Math 135 Business Calculus Spring 2009
Project: Monopoly Pricing
Due Monday, April 20
Introduction
When there is only one firm that produces a certain product, that one firm is called a monopoly.Monopolies are familiar to most consumers. Local phone service and electric power are often providedby monopolies. Monopolists have the advantage over firms that must compete since, without regulation,they might have the ability to control the price of their service by controlling the quantity produced. Aproduct that is in short supply will fetch a high price if people are demanding that product. Conversely,if the product is easy to come by, the price of it will be low. Monopolies could be detrimental to theconsumer if they were interested not in providing enough of their product for everyone but in providing just enough to maximize their profits.Some local monopolies that have received a lot of attention are cable TV franchises. People havebeen dissatisfied with having to pay extra fees for special cable channels. The question of regulating thecable companies has been a matter of some concern. In this project, you will be able to examine howmonopolies set prices and answer for yourself whether or not the cable companies should be regulatedby the government.
Going into Business
Suppose a small town has o
ff
ered to give you the rights to provide cable TV service to families in thetown. As a merchandiser you are interested in maximizing your profits. You are told that there are 100families in the town who do not have cable TV. The cost to you of providing cable TV is $20 per monthper family as well as $2000 in monthly overhead that is related to maintenance of your equipment anddoes not depend on how many families you service.Fifty families live in houses and fifty families live in apartments. It has been estimated that peopleliving in houses are more desirous of having cable TV. If you charge a price of
p
per month for a cableTV hookup, the following piecewise-defined function gives the number of families living in houses,
N
h
,who will pay for a hookup.
N
h
(
p
) =
50 if
p
≤
100100
−
12
p
if 100
<p
≤
2000 if
p>
200For instance, if
p
= 75, then
N
h
(75) = 50, meaning all 50 families living in houses will sign up. If
p
= 120, then
N
h
(120) = 100
−
12
(120) = 40, meaning 40 families will sign up.The following piecewise-defined function for
N
a
gives the number of families living in apartmentsthat will pay for a cable TV hookup if you charge a price
p
per month.
N
a
(
p
) =
Ω
50
−
13
p
if
p
≤
1500 if
p>
150Economists usually call these demand curves (or demand functions). The town that is giving youthe franchise will only allow you to set one price for cable TV.Your task is to determine what price you should charge for cable TV to maximize your profits bycarrying out the following steps.
•
You need to first determine a demand function
N
(
p
) that tells you the total number of families thatwill buy a cable TV hookup if you charge a price
p
per month, using the two demand functions
N
h
(
p
) and
N
a
(
p
). Plot the demand function
N
(
p
).
•
Your revenue is the amount of money that you take in from cable TV hookups. It is equal to theprice you charge times the number of cable TV hookups you sell. Express the revenue from salesin terms of the price,
p
, you charge per month. Plot the revenue as a function of price.1
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