Memo 1
To: Pricing Manager, Region 1
From: Regional Manager, Region 1 Cable System
Re: Profits from STARZ
We recently added the STARZ Network to our premium cable tier. Currently, 852 of our basic service subscribers purchase this service at our current price of $10.50 per month. As you know, our current contributions from STARZ are not as high as we expected. I would like you to evaluate our current price to see if we might be able to raise or lower it to enhance the contributions of STARZ to our revenues and ultimately profits.
Hint: Estimate the demand curve from the attached price and quantity data to get the slope and find the price elasticity of demand for the current price and quantity, and tell me, using the optimal pricing formula (actual markup versus optimal markup), if we should increase or decrease prices.
In the abovementioned earlier study of the feasibility of adding STARZ, the marketing department obtained the attached data on the demand and costs for this channel in our Region 1 service area. In addition to the fixed administrative costs, there is a variable cost (license fee) of $5.49 per customer. Please use these data to provide your recommendation about whether we should increase or decrease prices (from the $10.50 we are charging now) to increase total profits. I am particularly interested in (1) an estimate of our profit-maximizing price, and (2) an estimate of how much our monthly profit will increase if we adjust price to your recommended level.
(Hint: Calculate the total costs, total revenue and provide the profits for all prices. Find the profit maximizing price, and tell me how much our profits will increase if we move to the profit maximizing price).
Attachment:- excel.rar