Refer to Scenario 13.2 below to answer the question(s) that follow.
SCENARIO 13.2: The government of Stratospheria is currently inviting investors to bid for the exclusive right to provide cable television service to its residents. The market demand for this service is P=55-0.01Q, where Q is the number of households that would subscribe to the cable service and P is the monthly fee charged to the subscribers. The associated marginal revenue curve is MR=55-0.02Q. Fun Cable Company is interested in bidding for the right to provide cable service in Stratospheria. It has a constant average and marginal cost of $5 for providing cable service to each household.
-Refer to Scenario 13.2. If Fun Cable Company were to be awarded the exclusive right to provide cable service in Stratospheria, what price would it charge per household per month?
A) $5.00
B) $27.50
C) $30.00
D) $55.00

Question

Quizplus · Accepted Answer

To maximize profits, Fun Cable Company would set its marginal revenue (MR) equal to its marginal cost (MC). Given MR = 55 - 0.02Q and MC = $5, setting MR = MC gives 55 - 0.02Q = 5. Solving for Q gives Q = 2500. Substituting Q back into the demand equation to find P: P = 55 - 0.01(2500) = $30.