Question

Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.

If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize its profit, and what is the amount of the profit?
a. price = $20; profit = $400,000
b. price = $20; profit = $330,000
c. price = $150; profit = $450,000
d. price = $150; profit = $600,000

If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate?
a. $500,000
b. $600,000
c. $850,000
d. $925,000

What is the deadweight loss associated with the non-discriminating pricing policy compared to the price discriminating policy?
a. $375,000
b. $400,000
c. $475,000
d. It cannot be determined from the information provided.

Answer 1

Q1.

Ans: C. Price =$150, profit =$450000.

Explanation : if he cannot price discriminate then whether he can sell at 150 or at 20 price. So if he will sell at 150 the TR will be 150*4000=600000. And profit will be TR-TC =600000-150000=450000.

But if will sell at 20 he can able to sell 20000+4000=24000 unit. So TR will be =20*24000=48000.now profit will be 480000-150000=330000.

Q2.

C. $850000.

​​​​​​

Explanation :

Here TR=P*Q

For 150 price =150*4000

   =600000.

For 20 price =20*20000

   =400000.

So total will be 600000+400000=1000000.

.now profit =TR-TC

​​​​​​ =1000000-150000

   =850000.

Q3.

Ans : 400000.

Explanation : when firm will produce to maximise its profit then there is dead weight loss. Here if firm want to maximise its profit he will only subscribe 40000 tv subscribers at $150. And will not subscribe that 20000 subscribers. So here we can say that firm has capacity to use resources but not using that resources or its producing less than its capacity. So that amount of loss will be called as dead weight loss.

So deadweight loss will be that amount of revenue firm can generate if he produce as per his capacity is =20000*20= 400000.