Table 17-5
The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero.
-Refer to Table 17-5. If there is only one digital cable TV company in this market, what price would it charge for a premium digital channel subscription to maximize its profit?
A)$30
B)$60
C)$90
D)$150

Question

Table 17-5
The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero. 
-Refer to Table 17-5. If there is only one digital cable TV company in this market, what price would it charge for a premium digital channel subscription to maximize its profit?
A)$30 
B)$60 
C)$90 
D)$150

Quizplus · Accepted Answer

To maximize profit, the digital cable TV company should set its price where marginal revenue (MR) equals marginal cost (MC). Since the marginal cost of providing the premium channel service to a household is zero, the marginal cost is constant at $0. Therefore, the company should set its price where MR equals 0. To find the MR for each price level, subtract the total revenue at the current price level from the total revenue at the next price level. For example, when the price is $90, the total revenue is $360,000 (4,000 subscribers × $90), and when the price is $60, the total revenue is $480,000 (8,000 subscribers × $60). Therefore, the MR of lowering the price from $90 to $60 is $120,000. Continuing this process, we can find the table below:

| Price | Quantity Demanded | Total Revenue | Marginal Revenue |
|-------|------------------|---------------|------------------|
| 30    | 16,000           |  $480,000     |  N/A            |
| 60    |  8,000           |  $480,000     |  $120,000      |
| 90    |  4,000           |  $360,000     |  $-120,000     |
| 120   |  2,000           |  $240,000     |  $-120,000     |
| 150   |  1,000           |  $150,000     |  $-90,000      |

Since MR is negative for prices above $60, the company should not set its price above $60. Therefore, the company should set its price at $60 to maximize profit.

Table 17-5 The Information in the Table Below Shows the Total Demand