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An Unregulated Company

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Consider a situation where a city is considering services from one cable provider in a given area. Given the demand and total cost functions of

P = 28 - 0.0008Q
TC = 120,000 + 0.0006Q2

Where Q is number of cable subscribers and P price in dollars of monthly cable service.

1. How many cable subscribers would be expected if cable firm was allowed to operate completely unregulated
2. How many cable subscribers would be expected if company acted like a perfect competitor
3. How many cable subscribers would be expected if city did not allow the firm to charge more than $18 price
4. What is profit if company was allowed to operate completely unregulated
5. What would be deadweight loss if company acted like a perfect competitor
6. What would be gain in social welfare if company was forced to act like a perfect competitor instead of an unregulated monopoly

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Solution Preview

1. How many cable subscribers would be expected if cable firm was allowed to operate completely unregulated
When the firm is unregulated, it can play as a monopoly and maximize it profit by first order condition, MR = MC.
The firm faces the demand P = 28 - 0.0008Q
Then the total revenue is TR = P*Q =28 - 0.0008Q2
Marginal revenue is MR = dTR / dQ = 28 - 0.0016Q
Its marginal cost is MC = dTC / dQ = 0.0012Q
So the first order condition, MR = MC is:
28 - 0.0016Q = ...

Solution Summary

This posting determines gain in social welfare.

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As you think about your answer to this question, keep the following questions in your mind: 1) Is it feasible to achieve profitability with Commercial usage? What is the evidence that supports your conclusion? 2) What would happen if Flores did not do anything? 3) How much fixed cost does Commercial cover? 4) What were the original reasons that Salem Telephone formed Salem Data services? Have they achieved these goals?
In responding to this final question, which relates your analysis to the strategic implications and management decisions for Salem Telephone, make sure you integrate the thinking from all activities related to this case including data and trends from the case, your calculations and analysis, and what you have learned from ICE's and presentations.
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Please use the case: “Salem Telephone Company” (Harvard Business School case, no. 9-104-086).

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