2. Suppose there is a cable company that has the ability to provide intemet service

over its cable lines. Assume that the marginal cost of the service is zero. (20

marks) A key feature is that the more users on the system the slower it is, and so the less

valuable the service. Suppose that there is a unit mass of consumers with taste

parameter 9 uniformly distributed where 0 < B < I. If a fraction u of the population

uses cable modems and the price is p then a user of type 9 has utility (l — u)(1 — 9)

— p, that is I like the service best when I am the only user and u = 0. A consumer

who does not obtain the service receives utility of 0. a) Show that if a user of type 9 buys when there are 11 users then type 9’ < 9 also

will also sign up for the service. (4 marks) b) Derive the demand function for this market. (10 marks) c) What is the monopoly level of price and quality in this market? (6 marks)