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 able to price discriminate, what would be the maximum amount of profit it could generate?
A)$500,000
B)$600,000
C)$850,000
D)$925,000

Question

Quizplus · Accepted Answer

Since Black Box Cable TV is able to price discriminate, it can charge different prices to different types of subscribers. The optimal pricing strategy is to charge a higher price to the die-hard TV viewers and a lower price to the occasional TV viewers.

Given the demand information provided in the scenario, Black Box Cable TV can charge $150 per year to the 4,000 die-hard TV viewers, generating $600,000 in revenue ($150 x 4,000). It can also charge $20 per year to the 20,000 occasional TV viewers, generating $400,000 in revenue ($20 x 20,000).

Therefore, the total revenue generated from the PMC service would be $1,000,000 ($600,000 + $400,000). Since Black Box Cable TV only pays $150,000 for the exclusive marketing rights to PMC, its profit would be $850,000 ($1,000,000 - $150,000).

This is the maximum amount of profit Black Box Cable TV can generate through price discrimination. Therefore, the correct answer is C.

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