Scenario 15-8
Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its market area. Let's assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the sports channel. Since Mega Media has already installed cable to all of the homes in its market area, the marginal cost of delivering the sports channel to subscribers is zero. The manager of Mega Media needs to know what price to charge for the sports channel service to maximize her profit. Before setting price, she hires an economist to estimate demand for the sports channel. The economist discovers that there are two types of subscribers who value premium sporting channels. First are the 3,000 die-hard sports fans who will pay as much as $150 a year for the new channel. Second, the premium sports channel will appeal to 20,000 occasional sports viewers who will pay as much as $25 a year for a subscription to it.
-Refer to Scenario 15-8. How much profit will Mega Media Cable TV earn if it sets the price at $25?

Question

Quizplus · Accepted Answer

If Mega Media Cable TV sets the price at $25, the total revenue will be:

3,000 die-hard sports fans x $150/year = $450,000
20,000 occasional sports viewers x $25/year = $500,000
Total revenue = $950,000

The profit will be the total revenue minus the cost of the exclusive marketing rights, which is:

Profit = $950,000 - $100,000 = $850,000

Therefore, if Mega Media Cable TV sets the price at $25, it will earn a profit of $850,000. However, if it sets the price higher than $25, it may lose some of the occasional sports viewers, and the total revenue and profit will decrease.

Scenario 15-8 Mega Media Cable TV Is Able to Purchase an Exclusive