1) Let us calculate consumer and producer surplus in the market for venture capi

Question

1) Let us calculate consumer and producer surplus in the market for venture capital investments in Silicon Valley. Let us measure the value of companies created and sold to venture capitalists in units of “unicorns”—one unicorn is a company that might become the next Facebook…

a) What, in the year 2016, will be the demand curve—in billions of dollars, and in “unicorns” created—if the maximum willingness-to-pay for even a small stake in a “unicorn” on the part of the most optimistic venture capital investor is $10 billion/ unicorn, and if each $1 billion reduction in the price charged for a one-unicorn investment increases the number of unicorns VC investors are willing to buy by 2 unicorns?

Explanation / Answer

The linear demand curve is of the form:

P = a - bQ where a: Vertical intercept and b: Slope coefficient

When Q = 0, P = a (Maximum willingness to pay)

Here, a = $10 billion

b = 2 (given)

So, equation of linear demand curve is:

P = 10 - 2Q (P in $ billion)

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