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Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting the price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, are the 20,000 occasional TV viewers who will pay as much as $25 a year for a subscription to PMC.
a. If Black Box Cable TV is unable to price discriminate, what price will it choose in order to maximize its profit, and what is the amount of the profit?
b. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate?
c. What is the deadweight loss associated with the nondiscriminating pricing policy compared to the price discriminating policy?
d. List and explain two conditions necessary for firms to be able to successfully practice price discrimination.
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