A cable television company pays companies who produce entertainment content for the exclusive rights to distribute programming in a given territory and charges a fee to customers who purchase programming packages. They face a negatively sloped demand curve for programming. In other words, the lower the monthly cable rate, the larger will be the number of subscribers.
1. Discuss whether the company should consider the costs of purchasing the programming rights when it attempts to calculate the marginal cost of adding a subscriber in any area where it already provides service if the charges for programming are not dependent on the number of cable subscribers.
2. Discuss whether the labor costs of an installer are necessarily part of the marginal cost of adding a subscriber in areas where service is already provided if installation is performed by technicians who are employed by the company to answer service calls for existing customers.
3. Discuss whether the number of subscribers that yield maximum revenue for the cable company is likely to differ considerably from the number of subscribers that maximizes profit. Illustrate your answer with a diagram. Hint -To simplify the problem assume a linear demand function. Use your answers to questions 1 and 2 when you answer this question.