You are the Pricing Manager for Region 1 Cable System. You received the memo below from the Regional Manager of Region 1 requesting for your recommendation. Details of the memo as are below: “We recently added the STARZ Network to our premium cable tier. Currently, 852 of our basic service subscribers purchase this service at our current price of $10.50 per month. As you know, our current contributions from STARZ are not as high as we expected. I would like you to evaluate our current price to see if we might be able to raise or lower it to enhance the contributions of STARZ to our bottom line. In an earlier study of the feasibility of adding STARZ, the marketing department obtained the attached data on the demand and costs for this channel in our Region 1 service area. Please use these data to provide your recommendation. I am particularly interested in: a. an estimated model showing the relationship between quantity (number of subscribers) and price. i. is price a significant determinant of demand? ii. explain the nature of relationship existing between price and number of subscribers. b. an estimate of the revenue maximizing price and how elastic the demand for our product is at that price. c. The change in our total revenue if we sell our product at the revenue maximizing price level than the current price of $10.5. d. an estimate of our profit-maximizing price, and e. an estimate of how much our monthly profit will increase if we adjust price from the revenue maximizing price to your recommended profit maximizing price”. 

 

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Price $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 $11.00 $11.50 $12.00 $12.50 $13.00 $13.50 $14.00 $14.50 $15.00 Number of Subscribers (Thousands) 1.493 1.500 0.938 1.224 1.105 0.952 1.205 1.212 1.234 1.104 0.842 0.881 0.872 0.981 0.664 0.848 0.488 0.227 0.249 0.503 0.305 Cost of License Fees (Thousands) $8.210 $8.247 $5.158 $6.729 $6.078 $5.234 $6.629 $6.664 $6.785 $6.071 $4.631 $4.847 $4.796 $5.395 $3.653 $4.666 $2.684 $1.248 $1.371 $2.764 $1.679 Divisional Sales, General, and Administrative Costs (Thousands) $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 Price $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 $11.00 $11.50 $12.00 $12.50 $13.00 $13.50 $14.00 $14.50 $15.00 Number of Subscribers (Thousands) 1.493 1.500 0.938 1.224 1.105 0.952 1.205 1.212 1.234 1.104 0.842 0.881 0.872 0.981 0.664 0.848 0.488 0.227 0.249 0.503 0.305 Cost of License Fees (Thousands) $8.210 $8.247 $5.158 $6.729 $6.078 $5.234 $6.629 $6.664 $6.785 $6.071 $4.631 $4.847 $4.796 $5.395 $3.653 $4.666 $2.684 $1.248 $1.371 $2.764 $1.679 Divisional Sales, General, and Administrative Costs (Thousands) $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20