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. What is the most Fun Cable Company would bid for the franchise?
A) $0
B) $62,500
C) $75,000
D) $112,500

Question

Quizplus · Accepted Answer

The correct answer is B. The most Fun Cable Company would bid for the franchise is $62,500. This is because the profit-maximizing quantity is Q=2,500 and the profit-maximizing price is P=$30. The total revenue is TR=P*Q=$75,000 and the total cost is TC=5*Q=$12,500. Therefore, the profit is $62,500.