Question

- - 3. Refer to Table 16-1. Assume that there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are able to "collude" on price and quantity of premium digital channel subscriptions to sell. As part of their collusive agreement they decide to take an equal share of the market. How much profit will each company make? a. $170,000 b. $40,000 c. $480,000 d. $540,000

Answer 1

(3) Each company will make a profit of - (c) $480,000

Reason - At price = $80 per year, and quantity = 6000, the profit = $480,000
and at another price level = $40 per year, and quantity = 12,000, the profit = $480,000.
Hence, if both the companies collude, they control the entire market and can make an equally better off profit of $480,000 each if any of the situations are chosen by either companies. It is better than say choosing a total profit of $540,000 at price = $60, when the profit for each company is 540,000/ 2 = $270,000.