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    Monthly Costs and current demand function

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    In February 2004, The Federal Communications commission (FCC) effectively deregulated the broadband industry in a close 3-2 vote that changed the rules of the 1996 Telecommunications Act. Among other things, the decision eliminates a rule that required the Baby Bells-Bell South, Owes Communication International, SBC Communications- to provide rivals access and discount rates to current broadband facilities and other networks they may build in future. Providers of digital subscribers lines (DSL) that use the local phone loop are particularly affected. Some argue that the agreement will likely raise many DSL providers' costs and reduce competition. Providers of high speed Internet services utilizing cable, satellite or wireless technologies will not be directly affected, since such providers are not bound by same facilities sharing requirements as firms using the local phone networks. In light of the recent FCC ruling, suppose that News Corp., which controls the United States' largest satellite-to-TV broadcaster, is contemplating launching a Space-way satellite that could high speed internet service. Prior to launching Spaceway satellite, suppose that News Corp. used least squares to estimate regression line of demand for satellite Internet services. The best fitting results indicate that the demand is

    Qdsat =152.5-0.9Psat+1.05 Pdsl+1.10 Pcable (in thousands), where Psat is the price of satellite internet service, Pdsl is the price of DSL Internet service, and Pcable is the price of high speed cable internet service.

    Suppose that after the FCC's ruling the price of DSL, Pdsl is $30 per month and monthly price of high speed cable Internet Pcable is $30. Furthermore, News Corp. has identified that its monthly revenues need to be at least $14 million to cover its monthly costs. If news Corp. set its monthly subscription price for satellite Internet service at $50, would its revenues be sufficiently high to cover its cost? Is it possible for News Corp. to cover its cost given the current demand function? Justify your answer.

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    Qd(sat)=152.5-0.9Psat+1.05 Pdsl +1.10 Pcable

    Psat=price of satellite internet services=$50
    Pdsl=price of DSL internet services=$30
    Pcable=Price of high speed cable internet services=$30
    Qd (sat) =demand for satellite users (in thousands)

    Plug in the figures and get the value of Qd(sat)
    Qd(sat)=152.5-0.9*50+1.05*30+1.10*30=172 thousands

    Revenue = Psat*Qd(sat)=50*172*1000=$8,600,000

    Monthly costs = $14 million
    Monthly revenue is not sufficient to ...

    Solution Summary

    Solution describes the steps to determine whether a price hike can help the company to cover its monthly costs using the given demand function?