Consider a cable TV company that has a fixed cost of $48 million and a marginal

Question

Consider a cable TV company that has a fixed cost of $48 million and a marginal cost of $5 per subscriber. The company is regulated with an average-cost pricing policy. The two columns of the following table show three points on the initial demand curve. For example, at a price of $15 the quantity demanded is six million subscribers. For each $2 reduction in price, the number of subscribers increases by one million. Fill in the blanks in the following table. The regulated price is___________


Price Subscribers (millions) Average Cost
$15 6 ______
13 7 ______
11 8 ______

Explanation / Answer

We are given: VC = MC*Q VC = 5*Q FC = 48 The cost curve is: TC = VC + FC VC = MC*Q TC = MC*Q + FC TC = 5*Q + 48 So, the average total cost is: ATC = TC/Q ATC = 5 + 48/Q We are given that a point on the demand curve is (15,6) and told that the slope is -(1/2). So, we can derive the demand curve: Q = A - b*P 6 = A - (1/2)*15 A = 6 + (1/2)*15 A = 13.5 Demand is: Q = 13.5 - P/2 Maybe you can use that for another part of this problem. All we are asked for here is average total cost. ATC = 5 + 48/Q ATC(6) = 5 + 48/6 = 13 ATC(7) = 5 + 48/7 = 11.8571429 ATC(8) = 5 + 48/8 = 11

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