Table 17-4. The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.

-Refer to Table 17-4.Assume there are two profit-maximizing high-speed Internet service providers operating in this market.Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions.How much profit will each company earn?
A) $80,000
B) $120,000
C) $160,000
D) $210,000

Question

Table 17-4. The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.
 
-Refer to Table 17-4.Assume there are two profit-maximizing high-speed Internet service providers operating in this market.Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions.How much profit will each company earn?
A) $80,000 
B) $120,000 
C) $160,000 
D) $210,000

Quizplus · Accepted Answer

To maximize their total profit, the two firms will collude to act as a monopoly by jointly determining the quantity to produce and the price to charge. The firms will produce the quantity at which their marginal revenue equals their joint marginal cost, which, in this case, is the total demand at a price of $100 per subscription.

The total demand for subscriptions is 2,000 + 1,500 + 1,000 + 500 = 5,000.

At a price of $100 per subscription, the total revenue is 5,000 x $100 = $500,000.

The total variable cost is the sum of the marginal costs, which is $80 x 5,000 = $400,000.

Therefore, the total profit is $500,000 - $200,000 (fixed cost) - $400,000 (variable cost) = $100,000.

Since there are two firms, they will share the profit equally.

Thus, each company will earn a profit of $100,000 ÷ 2 = $50,000.

However, we need to remember that the firms are colluding, which is illegal under antitrust laws.