Question

Price Quantity Total Revenue Marginal Revenue Total Cost Marginal Cost RU 91 96 Suppose the local government imposes a $26 per month tax on cable companies. What will Comcast do? (Assume fixed costs equal $15.) A Comcast should produce 6 units in the short run and shut down in the long run O B. Comcast should shut down in the short run and in the long run. OC Comcast should shut down in the short run and produce 6 units in the long run OD. Comcast should produce 6 units in the short run and in the long run E. None of the above Suppose that the flat per month tax is replaced with a tax on the firm of $1 per cable subscriber. (Assume that Comcast will sell only the quantities listed in the table) To maximize profit, Comcast will sell subscriptions (enter a numeric response using an integer)

Answer 1

We can observe that Marginal Cost is equal to Marginal Revenue at the quantity of 6.

So, profit maximizing output is 6 units.

In this case,

Total Revenue=TR=$84

Total Cost=TC=60+26=$86

It shows that TR<TC. Firm is making loss.

Loss=TR-TC=84-96=-$2

We observe that Loss is less than fixed cost. So, firm should continue to produce 6 units. If it continues in long run, firm should shut down in long run,

Correct option is

A. Comcast should produce 6 units in short run and shut down in long run.

A per unit tax of $1 will increase the marginal cost by $1 as shown in following table.

Price, P	Quantity, Q	Marginal Revenue	New Marginal Cost
17	3
16	4	13	7+1=8
15	5	11	8+1=9
14	6	9	9+1=10
13	7	7	10+1=11
12	8	5	11+1=12

Comcast will increase output as long as Marginal Revenue is higher than or equal to marginal cost to maximize profit. We observe that MR>MC at Q=5 buy MR<MC at Q=6. So,

Optimal output is 5 units.

To maximize profit, Comcast will sell 5 subscriptions