Refer to Scenario 13.1 below to answer the question(s) that follow.
SCENARIO 13.1: The government of Catalina Island is currently inviting investors to bid for the exclusive right to provide cable television service to its residents. The market demand for this service is P = 55 - 0.01Q, where Q is the number of households that would subscribe to the cable service and P is the monthly fee charged to the subscribers. The associated marginal revenue curve is MR = 55 - 0.02Q. Universal Entertainment is interested in bidding for the right to provide cable service on Catalina Island. It has a constant average and marginal cost of $15 for providing cable service to each household.
-Refer to Scenario 13.1. If Universal Entertainment were to be awarded the exclusive right to provide cable service on Catalina Island, what price would it charge per household per month?
A) $15.00
B) $27.50
C) $35.00
D) $55.00

Question

Quizplus · Accepted Answer

To find the profit-maximizing price, set MR equal to MC and solve for Q, then use the demand equation to find P. MR = MC gives 55 - 0.02Q = 15. Solving for Q gives Q = 2000. Substituting Q = 2000 into the demand equation P = 55 - 0.01(2000) gives P = $35.