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, how much profit would it earn?
A) $0
B) $40,000
C) $70,000
D) $80,000

Question

Quizplus · Accepted Answer

Universal Entertainment would earn a profit of $40,000. To maximize profits, Universal Entertainment will set MR = MC. Solving for Q, we get Q = 2,000. Substituting Q = 2,000 into the demand curve, we get P = $35. Therefore, Universal Entertainment will charge a monthly fee of $35 to each of the 2,000 households that subscribe to the cable service. Total revenue will be $35 * 2,000 = $70,000. Total cost will be $15 * 2,000 = $30,000. Therefore, profit will be $70,000 - $30,000 = $40,000.