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. What is the most Universal Entertainment would bid for the franchise?
A) $0
B) $40,000
C) $70,000
D) $80,000

Question

Quizplus · Accepted Answer

Universal Entertainment would bid $40,000 for the franchise. This is because the profit-maximizing quantity is Q = 2,000 and the profit-maximizing price is P = $35. The total revenue is $70,000 and the total cost is $30,000, so the profit is $40,000.