Nick D’Aloisio isn’t your average 17 year old high school student. Instead of spending his summers at the movies or at a minimum wage job, Nick spent the last three summers, at an average of 17 hours per day, writing a program called Summly (formally Trimit), which is an algorithm that takes long- form stories and shortens them for readers using smartphones. With Nick’s design, Summly actually uses patterns to “learn” how to form the optimal summary of news articles and other long-form texts for our advantage. This patented, one of a kind App will surely transform the way we consume media and therefore, the way we see the world around us. Yahoo, who seems to agree with this sentiment, recently made Nick D’Aloisio one of their richest and youngest new employees – buying Summly from Nick for an estimated 30 million dollars.Suppose Yahoo estimates that the demand in a particular market for this App is P = 100 – 2Q, where P represents the price per App and Q represents the number of Apps purchased for a set amount of time.Suppose also that the marginal cost and average cost are equal at $5 regardless of the quantity of long- form texts that are summarized.
Using this information answer questions a through e.
A. In recent interview with PBS’s Charlie Rose, Nick described the grueling process of both creating Summly and getting Summly onto the App Store and out to the public. He even describes the difficulty in obtaining a computer with enough power to handle his algorithm. Given the number of hours Nick invested in this invention and the reality that the value of this time, given his unique programing abilities, is astronomically high, how can it be that the estimated marginal and average cost of production is so low? Hint: Be sure to articulate what costs should and should not be factored into MC and AC.
B. How many Summly Apps are bought and sold in the market? How much will consumers pay for each App? Is there any deadweight loss due to the market price and quantity Yahoo will charge? If so, what is it? Show your findings graphically. Round to the nearest hundredth place. Disclaimer: Don’t worry if the prices and quantities aren’t realistic.
C. In his interview with Charlie Rose, Nick D’Aloisio spoke of his desire to continue to work on patentable technological advances throughout his lifetime. How might a weakened patent system change Nick’s incentives to work on new projects? Given you answer to the above question, is there any way to justify copyright laws on the basis of economic efficiency?