Angela King is the Las Vegas promoter for professional fighter Randy Couture. King is promoting a new Octagon world championship fight for Couture. The key area of uncertainty is the size of the cable pay-per-view TV market. King will pay Couture a fixed fee of $3.2 million and 25% of net cable pay-per-view revenue. Every cable TV home receiving the event pays $45, of which King receives $27. King pays Couture $6.75, 25% of the $27.
King estimates the following probability distribution for homes purchasing the payper-view event:
Demand Probability
250,000 ... 0.05
300,000... 0.10
350,000... 0.20
400,000... 0.40
500,000... 0.15
1,000,000... 0.10
1. What is the expected value of the payment King will make to Couture?
2. Assume the only uncertainty is over cable TV demand for the fight. King wants to know the breakeven point given her own fixed costs of $1.3 million and her own variable costs of $2.25 per home.

  • CreatedJuly 31, 2015
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