# The Demand From Advertisers Economics Essay

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PVRs will negatively impact the demand from advertisers as end viewers have the option to block advertisements at will. Thereby, the demand for advertising space on television channels will decline significantly.

2. Suppose you are in charge of setting the price for commercial advertisements shown during Enemies, a top network television show. There is a 60-minute slot for the show. However, the running time for the show itself is only 30 minutes. The rest of the time can be sold to other companies to advertise their products or donated for public service announcements. Demand for advertising is given by:

Qd = 30 - 0.0002P + 26 V

where Qd = quantity demanded for advertising on the show (minutes), P = the price per minute that you charge for advertising, and V is the number of viewers expected to watch the advertisement (in millions).

a. All your costs are fixed and your goal is to maximize the total revenue received from selling advertising. Suppose that the expected number of viewers is one million people. What price should you charge? How many minutes of advertising will you sell? What is total revenue?

b. Suppose price is held constant at the value from part (a). What will happen to the quantity demanded if due to PVRs the number of expected viewers falls to 0.5 million? Calculate the "viewer elasticity" based on the two points. Explain in words what this value means.

a. Condition for revenue maximization is marginal revenue equal to zero i.e. MR = 0

Given: Expected number of viewers = 1 million

Qd = 30 -0.0002P + 26V

1) Find P in terms of Qd

P = 150000 +130000V - 5000Qd

2) Multiply both sides of the above equation by Qd

P * Qd = 150000 Qd +130000V Qd - 5000Qd2 â€¦â€¦ equation 1

Total Revenue (TR) = P * Qd

Therefore, substituting the above formula in equation 1 gives the following

TR = 150000 Qd +130000V Qd - 5000Qd2

3) Differentiate the above equation with respect to Qd

d(TR) = 150000 + 130000V - 10000 Qd

4) Since marginal revenue is the differential of TR with respect to Qd and MR = 0 for revenue

maximization, the above equation becomes

MR = 150000 + 130000V - 10000 Qd = 0

5) By substituting V = 1 in the above equation and solving for Qd, the value of Qd is obtained.

Qd = 28 minutes

6) Thereby, the value of P can be found as follows

P = 150000 +130000V - 5000Qd

P = 150000 +130000 * 1 - 5000 * 28

P = \$ 140,000

7) The maximum revenue is calculated as follows

TR = P * Qd

TR = 140000 * 28 = \$ 3,920,000

Thus, the price charged is \$ 140,000, the minutes of advertising sold is 28 minutes, and the total revenue is \$ 3,920,000.

b. Expected number of viewers = 0.5 million

Price = \$ 140,000

Therefore, Qd = 30 -0.0002P + 26V

Qd = 30 - 0.0002 (140,000) + 26 (0.5) = 30 - 28 + 13 = 15 minutes

The quantity demanded has gone down from 28 minutes to 15 minutes.

The viewer elasticity can be calculated as follows: |Ep|= (âˆ†Q/âˆ†V) * (V/Q)

|Ep|= ((28 - 15)/0.5) * (1/28) = 13/14 = 0.9285

As |Ep|< 1, this suggests that viewership is inelastic. Therefore, a decrease in the number of viewers will decrease the demand for advertising.

3. As more viewers begin using PVRs, what happens to the revenues of the major networks (CBS, NBC, ABC, and FOX)?

An increase in the usage of PVR will result in a decrease of revenues of major TV networks. Increasing adoption of PVR reduces the ad-viewership and hence there is a fall in revenues of major TV networks. The total revenue is given by price * quantity demanded. If the price remains constant, then a decrease in the total quantity demanded will result in a corresponding decrease in the total revenue.

4. Discuss the long-run effects if a significant proportion of the viewers begin adopting these "advertising snipping" systems.