Scenario 15-7
Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.
-Refer to Scenario 15-7. If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize its profit, and what is the amount of the profit?
A)price = $20; profit = $400,000
B)price = $20; profit = $330,000
C)price = $150; profit = $450,000
D)price = $150; profit = $600,000

Question

Quizplus · Accepted Answer

Since Black Box Cable TV is unable to price discriminate, it can only charge one price to all subscribers. To maximize profit, Black Box should set the price at the level where demand equals marginal cost, or zero in this case. The demand for the PMC service is made up of two groups of subscribers with different willingness to pay: 4,000 who will pay up to $150 and 20,000 who will pay up to $20. To find the price that maximizes profit, we need to find the point where the marginal revenue equals marginal cost. Since the marginal cost of delivering the PMC service is zero, the marginal revenue is simply the price. The marginal revenue of the first group of subscribers is $150, and the marginal revenue of the second group is $20. At a price of $150, only the first group will subscribe, bringing in revenue of $600,000. At a price of $20, both groups will subscribe, bringing in revenue of $440,000. Therefore, the price that maximizes profit is $20, and the profit is $450,000 ($440,000 in revenue minus $150,000 in marketing costs).

Scenario 15-7 Black Box Cable TV Is Able to Purchase an Exclusive