What is the value of short run equilbrium and price output?

Question

ABCT, Inc., has been granted a limited-term exclusive license to operate a cable television system in Jackson, Wyoming. Recent operating experience in similar locations suggests a close relation between the monthly price for basic service and the number of subscribers.

A. Complete the following table based on ABCT’s projected price, output, and monthly total cost data:

Price($000)= 50, 40, 30, 25, 20, 15

Output= 0, 1, 2, 3, 4, 5,

TR= unknown

MR($000)= unknown

TC($000) = 0,20,40,60,80,100

MC= unknown

B. Calculate the short-run equilibrium monopoly price/output combination and profit level.

C. Calculate the long-run price/output combination and profit level if competitive bidding for the franchise resulted in a perfectly competitive market outcome.

Answer 1

A. Complete the following table based on ABCT’s projected price, output, and monthly total cost data:

Price($000)= 50, 40, 30, 25, 20, 15

Output= 0, 1, 2, 3, 4, 5,

TR($000)=  0, 40,60,75,80,75

MR($000)= 0,40, 20, 15, 5, -5

TC($000) = 0,20,40,60,80,100

MC($000)= 0,20,20,20,20,20

B. Calculate the short-run equilibrium monopoly price/output combination and profit level.

Shortrn equlibrium occurs when MC=MR = 20 at output= 2 and the equlibrium price is $30,000.

Profit = TR-TC at output of 2 = $60,000-$40000=$20,000

C. Calculate the long-run price/output combination and profit level if competitive bidding for the franchise resulted in a perfectly competitive market outcome.

If the competitive bidding is done, the longrun equlibrium will ensure that there is no profit other than the element of normal profit included in cost. Therefore, the longrun output and price will be determined by zero profit which occurs at ouput of 4 units where TR=$80,000=TC