Question

Suppose that Comcast has a cable monopoly in Philadelphia. The following table gives Comcast's demand and costs per month for subscriptions to basic cable (for simplicity, we keep the number of subscribers artificially small.)
Price Quantity Total Revenue Marginal Revenue Total Cost Marginal Cost
68 3 204 - 144 -
64 4 256 52 172 28
60 5 300 44 204 32
56 6 336 36 240 36
52 7 364 28 280 40
48 8 384 20 324 44
Suppose the local government imposes a $99 per month tax on cable companies. What will Comcast do? (Assume fixed costs equal to $60.)
A. Comcast should produce 6 units in the short run and shut down in the long run.
B. Comcast should produce 6 units in the short run and in the long run.
C. Comcast should shut down in the short run and in the long run.
D. Comcast should shut down in the short run and produce 6 units in the long run.
E. None of the above.
Suppose that the flat per-month tax is replaced with a tax on the firm of $4 per cable subscriber. (Assume that Comcast will sell only the quantities listed in the table.) To maximize profit, how many subscriptions should Comcast sell, and at what price? What will be the profit?

Answer 1

Answer:

A. Comcast should produce 6 units in the short run and shut down in the long run.

Explanation:

Comcast in operating cable business. The government of Philadelphia has imposed a tax of $99 every month. Comcast should produce 6 units in the short run. This will minimize it total cost and the company will be able to continue its operation in the short run. If the taxes persist in the long run then the company will go towards shut down.