1/29/2021 [Solved] Chapter CTMC, Problem Memo7 - Managerial Economics & Business Strategy (9th Edition)

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Chapter CTMC, End of Chapter, Case-Based Exercises, Exercise Memo7

Here is the step-by-step explanation, veri ed by an educator:

Step 1 of 3

A 10% premium on the current price of $79.95 implies that the price currently being charged is $87.95, and, therefore, the market
share is 60%. The margin contribution at this current price and market share is determined using the formula:

Margin Contributioncurrent price = Price with premium - programming fees -

maintaining and service costs

Similarly, the margin contribution at the reduced new price would be as follows:

Margin ContributionNew price = New price - programming fees -

maintaining and service costs

Margin Contributioncurrent price = $87.95 − $49.50 − $6.50

= $31.95
MarginContributionNewprice =$79.95 − $49.50 − $6.50
= $23.95

Step 2 of 3

The monthly contribution is determined as the product of the number of households and the market share and the margin
contribution.

Monthly contribution = Number of households × Market share ×

margin contribution

Assuming the price of $87.95 to be high and the price of $79.95 to be low, the pro tability of the rm TWC is determined.

(High price/Low price) = 110, 000×0.6 ×31.95

=$2,108,700
(Lowprice/Lowprice) = 110, 000×0.65×23.95
=$1,712,425

(High price/High price) = 110, 000 × 0.65 × 31.95

= $2, 284, 425
(Lowprice/Highprice) = 110, 000 × 0.70 × 23.95
= $1, 844, 150

Step 3 of 3

The pro tability of the rm TWC from charging a lower or higher price is shown in the table below:

  Competitor charges High Price Competitor charges Low Price

https://www.coursehero.com/textbook-solutions/Managerial-Economics-Business-Strategy-9th-Edition-9781259290619-2657/Chapter-CTMC-Problem-Memo7-2532629/?__chid=8e975bb4-59dc-478b-a304-76d200d7… 1/2
1/29/2021 [Solved] Chapter CTMC, Problem Memo7 - Managerial Economics & Business Strategy (9th Edition)

TWC charges High Price $2,284,425 $2,108,700

TWC charges Low Price $1,844,150 $1,712,425

From the table, it can be determined that the TWC always earns a higher pro t by charging a higher price, irrespective of
whether the competitor charges a lower or a higher price. Consequently, the pro ts will be maximized by charging the premium,
and there is no requirement for TWC to reduce its price.

Final answer 숥

There is no need to reduce the price as the rm always earns higher pro ts by charging higher prices, irrespective of the
prices charged by the competitors.

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쇲 CBM, Ex Memo6 CBM, Ex Memo8 쇰

Textbook Solutions / Managerial Economics & Business Strategy / Ch CTMC, End of Chapter, Ex Memo7

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