1. CableNow is the only supplier of cable TV services offering a wide range of TV channels. CableNow is an unregulated firm and is currently earning an economic profit. Assume that CableNow does not practice price
discrimination.
(a) Draw a correctly labeled graph for CableNow and show each of the following. Make sure your graph is large
enough to be legible.
(i) The profit-maximizing quantity of cable services, labeled as Q*
(ii) The profit-maximizing price, labeled as P*
(iii) The area of economic profit, completely shaded
(iv) The socially optimal level of cable services, assuming no externalities, labeled as Qs
(b) Assume that the government grants CableNow a lump-sum subsidy of $1 million. Will this policy change
CableNow's profit-maximizing quantity of cable services? Explain.
(c) Instead of granting a subsidy, assume now that the government chooses to require CableNow to produce the
quantity at which CableNow earns zero economic profit. On the graph you drew in part (a), label this
quantity QR