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The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market
The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.
| Quantity | Price (per year) |
| 0 | $320 |
| 2,000 | $280 |
| 4,000 | $240 |
| 6,000 | $200 |
| 8,000 | $160 |
| 10,000 | $120 |
| 12,000 | $ 80 |
| 14,000 | $ 40 |
| 16,000 | $ 0 |
Suppose there is only one high-speed Internet service provider in this market and it seeks to maximize its profit. The company will:
a. Sell 6,000 subscriptions and charge a price of $200 for each subscription,
b. Sell 8,000 subscriptions and charge a price of $160 for each subscription,
c. Sell 10,000 subscriptions and charge a price of $120 for each subscription,
d. Sell 12,000 subscriptions and charge a price of $80 for each subscription.
Expert Solution
Answer: A
Shown below is the table given in the question plus three extra columns. The first added column is total revenue which is just quantity multiplied by price. The second is marginal revenue which is the change in revenue from one row to the next. Marginal cost is the final column and is constant since each row increases by the same quantity and the marginal cost of a single additional subscription is always $80.
As stated above, profit is maximized at the last point where marginal revenue is above or equal to marginal cost. In this case, that happens at quantity 6,000 and price $200. Thus, he answer is A.
| Quantity | Price (per year) | Total Revenue | Marginal Revenue | Marginal Cost |
|---|---|---|---|---|
| 0 | $320 | $0 | - | - |
| 2,000 | $280 | $560,000 | $560,000 | $160,000 |
| 4,000 | $240 | $960,000 | $400,000 | $160,000 |
| 6,000 | $200 | $1,200,000 | $240,000 | $160,000 |
| 8,000 | $160 | $1,280,000 | $80,000 | $160,000 |
| 10,000 | $120 | $1,200,000 | -$80,000 | $160,000 |
| 12,000 | $ 80 | $960,000 | -$240,00 | $160,000 |
| 14,000 | $ 40 | $560,000 | -$400,000 | $160,000 |
| 16,000 | $ 0 | $0 | -$560,000 | $160,000 |
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