Gouge-em Cable Company is the only cable television service
company licensed to operate in Backwater County. Most of its
costs are access fees and maintenance expenses. These fixed costs total $640,000 monthly. The marginal cost of adding
another subscriber to its system is constant at $2 per month.
Gouge-em’s demand curve can be determined from the data
in the accompanying table.
a. What price will Gouge-em charge for its cable services?
What are its profits at this price?
b. Now suppose the Backwater County Public Utility
Commission has the data and believes that cable
subscription rates in the county are too expensive and that
Gouge-em’s profits are unfairly high. What regulated price
will it set so that Gouge-em makes only a normal rate of
return on its investment?
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