Memo 6

To:Director of Marketing, Midwest Region

From: Chief Financial Officer

Re:Economic planning

I attended a breakfast this morning in which a group of economists presented the economic outlook for Midwest region for the coming year. According to their forecasts, the likelihood of a recession is as high as 40 percent. It is imperative that we be prepared in case a recession hits the country.

Our research intern pulled some data on household income from the last economic slowdown and we matched it up with the number of subscriptions for our video services. At first glance, it looks like we didn't have too many cancellations. However, in looking a little closer, it appears that a significant number of subscribers downgraded their service to a lower tier.

As you know, our two most popular tiers of television programming are Favored TV for $80 per month and Basic TV for $40 per month. The programming fees that we pay for the Favored TV are $48.50 per subscriber, while programming fees for Basic TV are $18.50. Both sets of customers have maintenance, billing, and service costs of $9.20 per subscriber. Currently, in this region, we have 27,800 Favored TV subscribers and 17,800 Basic TV subscribers.

One of the quant guys ran a regression based on incomes and subscriptions from that two year period, but I can't quite figure out what it means. Can you use the attached data to calculate the impact on our subscriptions, revenue, and profit in the Midwest region if we were to sustain a recession that led to a 2 percent decline in average household income?

**The excel file is to run a regression for the demand equation. I run the regression the result is shown below. You don't need the excel file.

Please use the following regression results for your analysis:

1. Favored TV

Q = -8.882+1.793*ln(Income)

2. BASIC

Q = 11.988-0.207*ln(Income)

Use the above demand equations ( expressed in log) to get income elasticity and analyze the case.

TC = VC +FC

Profit = TR -TC