Question

Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services, the company's marginal revenue (MR), marginal cost (MC), and average total

Answer 1

The profit maximizing quantity is 24,000 households and the profit maximizing price is $35. The quantity is where the marginal cost is equal to the marginal revenue and the price is the market demand price at the same quantity. The total revenue is equal to the equilibrium price multiplied by the equilibrium quantity. The total cost is equal to the average total cost multiplied by the equilibrium output. The profit is equal to the total revenue minus the total cost.

At Profit Maximization

Q = 24,000

P = $35

TR = $35 * 24,000 = $840,000

TC = $18 * 24,000 = $432,000

Profit = $840,000 - $432,000 = $408,000

The firm in the long run will stay in the market because it is making economic profit.

The profit maximizing quantity under marginal cost pricing is 51,000 households and the equilibrium price is $10. The total revenue is equal to the equilibrium price multiplied by the equilibrium quantity. The total cost is equal to the marginal cost multiplied by the equilibrium output. The profit is equal to the total revenue minus the total cost.

At Marginal Cost Pricing

Q = 51,000

P = $10

TR = $10 * 51,000 = $510,000

TC = $10 * 51,000 = $510,000

Profit = $510,000 - $510,000 = 0

The firm in the long run will exit the market because the average total cost (ATC) is greater than the marginal cost (MC) and at this price it can't cover its total costs.

The profit maximizing quantity under average total cost pricing is 46,000 households and the equilibrium price is $14. The total revenue is equal to the equilibrium price multiplied by the equilibrium quantity. The total cost is equal to the equilibrium quantity multiplied by the average total cost. The profit is equal to the total revenue minus the total cost.

At Average Total Cost Pricing

Q = 46,000

P = $14

TR = $14 * 46,000 = $644,000

TC = $14 * 46,000 = $644,000

Profit = $644,000 - $644,000 = 0

The firm in the long run is indifferent because it is making zero economic profit but it can cover its costs so it will stay in the market in the long run.

False, the cable company has a strong incentive under average cost pricing to cut costs so that it can make a profit in the short run and increase revenues in the long run.

Answer 2

Answer:

The profit maximizing quantity is 24,000 households and the profit maximizing price is $35. The quantity is where the marginal cost is equal to the marginal revenue and the price is the market demand price at the same quantity. The total revenue is equal to the equilibrium price multiplied by the equilibrium quantity. The total cost is equal to the average total cost multiplied by the equilibrium output. The profit is equal to the total revenue minus the total cost.

At Profit Maximization

Q = 24,000

P = $35

TR = $35 * 24,000 = $840,000

TC = $18 * 24,000 = $432,000

Profit = $840,000 - $432,000 = $408,000

The firm in the long run will stay in the market because it is making economic profit.