Scenario 14-8
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 14-8.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, it can potentially capture demand from both the die-hard sports fans and the occasional sports viewers.

The total revenue generated from the die-hard sports fans would be:
3,000 x $150 = $450,000

The total revenue generated from the occasional sports viewers would be:
20,000 x $25 = $500,000

Therefore, the total revenue generated from the sports channel service would be:
$450,000 + $500,000 = $950,000

Since the marginal cost of delivering the sports channel service is zero, this revenue would translate directly into profit.

Thus, if Mega Media Cable TV sets the price at $25, it would earn a profit of $950,000 - $100,000 (the cost of exclusive marketing rights) = $850,000.

However, if Mega Media Cable TV were to set the price at $150, it would only capture demand from the die-hard sports fans, resulting in a lower revenue and profit. Therefore, setting the price at $25 is the best choice.

Scenario 14-8 Mega Media Cable TV Is Able to Purchase an Exclusive