Question

1. Theo works for a large firm that is a monopolistic provider of cable TV services in a big city. At the present time, the firm charges $60 per month for basic cable service. The demand for cable TV in this town has been estimated to be Q 12,000 100P where Q is the number of subscribers (measured in hundreds) and P is the monthly price for basic cable. Thus, 600,000 residents currently purchase cable TV services from Theo's firm. Cable TV is an industry with high fixed costs but low marginal cost -in fact, the best estimate of the firm's cost of providing cable services to one more household is zero (so, MC 0 for this firm) (a) Is Theo's firm charging the right monthly rate? How do you know? (b) Suppose now that a law is enacted that requires cable providers to pay $3 to the government per subscriber (the money is to be used to pay for educational programs on public television). Theo's boss doesn't know what to do - should she leave the monthly rate at $60? Should she raise the monthly rate by $3 to offset the tax? She asks Theo for advice. What should he tell her to do? That is, what is the new profit-maximizing price? (c) How much of the tax is paid for by the firm?

Answer 1

Solution Given l00p Q = | ३००० ichargeoper month Residents 600,o00 Fiim changing ht monthly rate or not 12000 10p MC o Inverse demand fnctin can be derved fom dermand nR nction P120-00Q Pa120 -O 01Q2 MR120-0 02a or optinum level is mRmc

20/0-02 6000 P= 120-0.01(8) 120-0.0) C6000) -180-60 Fo te optim un pme iGo, optin on fit i TPa 69) (6000) 360000 and Cable T charging at Same pmce cohich is at optimun level The fim is eaning Total Ruenve is: % 36,000, oo0. cohich is also Profit

3 b mc= 3 due to araje in tax Yate then,the Calle should a comodate by charging at63 The quantity we - (00 C63) 12000 12000- 6300 Stoo o bal devenve గ్ర!00 a (stoo Cast Y400 3 5l00400 optimn profit after tax ($347 00 Cie)TR-1 = 35१\०० - |1५००) -TC O Tax paid by te m monopoly Pats on He texe to Confiuners higherthan

ferfeatly Competition elause price ifxed by the monopolst and cohere in perfest ompettran -fn is plqce taker ha no privt laged to fxed Pce Tax68 b0 3