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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 :

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.

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Rewritten by : Barada

Final answer:

When confronted with a $99 flat tax per month, Comcast should shut down both in the short and long run as the price doesn't cover average variable costs. However, with a tax of $4 per cable subscriber, Comcast should sell 6 cable subscriptions at a price of $56, generating a profit of $36.

Explanation:

First, let's address what Comcast will do when a $99 per month flat tax is imposed. With fixed costs totaling $159 ($60 original plus $99 tax), we can calculate the total cost for each quantity of subscriptions. In the short run, a company will continue to produce as long as the price covers the average variable cost. Here, we find that Comcast's average variable cost isn’t covered by the price at any quantity. Thus, the answer to the first question is C. Comcast should shut down in the short run and in the long run.

Now, let's consider the impact of a tax of $4 per cable subscriber. This raises the marginal cost of each subscription by $4. With this in mind, we see that to maximize profit, Comcast should sell 6 cable subscriptions at a price of $56 (where MR equals MC), resulting in a profit of $36 ($336 total revenue minus $300 total cost).

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