(Figure: Pay Per View Movies on Xfinity Cable) Use Figure: Pay Per View Movies on Xfinity Cable. The figure shows the demand and marginal revenue curves for on-demand movie rentals on Xfinity. Assume that marginal cost and average cost are constant at $20. If the cable company has market power, what price will it charge?

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Since the marginal revenue curve lies below the demand curve, we know that demand is relatively elastic. In order to maximize profits, the cable company will want to set a price where marginal revenue is equal to marginal cost. However, since they have market power, they will want to set a price that is higher than marginal cost in order to capture some of the consumer surplus. The point where marginal revenue equals marginal cost is where the marginal revenue curve intersects the constant marginal cost line ($20) which occurs at a price of $60. Therefore, the cable company will charge a price of $60 in order to maximize profits.