The accompanying table shows a small community’s demand for monthly subscription
ID: 1209332 • Letter: T
Question
The accompanying table shows a small community’s demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm’s marginal cost is constant and equal to 0 (zero). Furthermore, fixed costs are also assumed to be zero. Use this information to answer the question below.
Price/Month (P)
Number of Customers (Q)
Total Revenue/Month (TR)
$10
0
$0
$9
100
$900
$8
200
$1,600
$7
300
$2,100
$6
400
$2,400
$5
500
$2,500
$4
600
$2,400
$3
700
$2,100
$2
800
$1,600
$1
900
$900
$0
1,000
$0
Listed below are four different collusive agreements that Nextflix and Flixbuster are considering. Assuming both firms will abide by the terms, which collusive agreement(s) would maximize total profit in the market?
I. Nextflix supplies 400 subscriptions and Flixbuster supplies 500 subscriptions.
II. Nextflix supplies 500 subsciptions and Flixbuster supplies 300 subscriptions.
III. Nextflix supplies 250 subscriptions and Flixbuster supplies 250 subscriptions.
IV. Nextflix supplies 100 subscriptions and Flixbuster supplies 400 subscriptions.
agreement I
agreements I and II
agreement IV
agreements II and III
agreements III and IV
Price/Month (P)
Number of Customers (Q)
Total Revenue/Month (TR)
$10
0
$0
$9
100
$900
$8
200
$1,600
$7
300
$2,100
$6
400
$2,400
$5
500
$2,500
$4
600
$2,400
$3
700
$2,100
$2
800
$1,600
$1
900
$900
$0
1,000
$0
Explanation / Answer
It has been provided that fixed costs is zero and marginal costs is also zero. This implies that total cost of providing the streaming movie service is zero. With total cost being zero, all of the total revenue will be the profit for the firms' concerned.
The given table shows that total revenue or total profit is maximized in the market when 500 subscriptions are supplied at $5 per subscription.
So, if both firms collude and agree among themselves to provide a total of 500 subscription in the market then total profit can be maximized.
Out of all given agreements, agreement III and IV are such that they will keep the total number of subscriptions at 500 and thus will maximize the total profit in the market.
Hence, the correct answer is opiton (E).
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