6. Critical analysis Q13 Gouge-em Cable Company is the only cable television ser

Question

6. Critical analysis Q13

Gouge-em Cable Company is the only cable television service company licensed to operate in Backwater County. Most of its costs are access fees and maintenance expenses. These fixed costs total $240,000 monthly. The marginal cost of adding another subscriber to its system is constant at $7 per month. Gouge-em's demand curve can be determined from the data in the accompanying table.

Complete the following table by computing the total revenue, total cost, and profit at each of the various subscription prices.

Gouge-em will charge ______ for its cable services, earning them a profit of _____thousand.

Now suppose the Backwater County Public Utility Commission has the data and believes that cable subscription rates in the county are too expensive and that Gouge-em's profits are unfairly high.

What regulated price will it set so that Gouge-em makes only a normal rate of return on its investment?

$5

$10

$15

$20

Subscription Price Number of Subscribers Total Revenue Fixed Cost Total Cost Profit (Thousands Per Month) ($, Thousands) ($, Thousands) ($, Thousands) ($, Thousands) $25 20 _____ $240 _______ _______ 20 40 ______ $240 _______ _______ 15 60 ______ $240 _______ _______ 10 80 ________ $240 _______ ________ 5 100 ________ $240 _________ _________ 1 150 $240

Explanation / Answer

25

Gouge-em will charge $20 for it's cable charges , earning them a profit of $520,000.

The price will be set at $10 so that Gouge-em makes only a normal rate of return on it's investment that is $240,000.

Subscription Price No.of Subscribers Total Revenue Fixed Cost Total Cost Profit

25

20 500 240 140 360 20 40 800 240 280 520 15 60 900 240 420 480 10 80 800 240 560 240 5 100 500 240 700 -200 1 150 150 240 1050 -900

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