Ambika Adhikari

EMBA FALL 2012

1. A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the services regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friends monthly demand for minutes of calling is given by the equation, where p is the price of a minute. Then, QD=150-50P a. With each provider, what is the cost to your friend of an extra minute on the phone? b. In light of your answer to (a), how many minutes would your friend talk on phone with each provider? c. How much would he end up paying each provider every month? d. How much consumer surplus would be obtained with each provider? e. Which provider would you recommend that your friend choose? Why? Answer: a. From question, the cost per minute is $1 per minute for provider B and $0 for provider A. b. We have, QD=150-50P, Lets draw a demand schedule: Price/minute Calls Maximum call he can 0 150 make in a month 1 100 2 50 3 0 From above demand schedule, it is clear that he can make a maximum of 150 calls in a month and he can make 100 calls per month if he pays $1 per minute. Thus, with provider A he talks 150 minutes and with provider B he talks 100 minutes.

c. For provider A it is fixed, he will pay $120 per month irrespective of calls he make. With provider B, he makes 100 calls. So he ends up paying 100 *$1/minute=$100. d.

Ambika Adhikari

EMBA FALL 2012

For provider A, Consumer Surplus = *b*h - total cost = *150*3 120 = 225-120 = $105 For Provider B, Consumer Surplus = *b*h t = *100*2 = $100 e. I would recommend provider A rather than provider B because consumer surplus for provider A is higher than for provider B.

Ambika Adhikari

EMBA FALL 2012

Q 10. Consider total cost and total revenue given in the following table. Quantity Total Cost ($) 0 8 1 9 2 10 3 11 4 13 5 19 6 27 7 39

Total Revenue 0 8 16 24 32 40 48 56 ($) a) Calculate profit for each quantity. How much should the firm produce to maximize profit? b) Calculate marginal revenue and marginal cost for each quantity .Graph them. At what quantity do these curves cross? How does this relate to your answer to part (a)? c) Can you tell whether this firm is in a competitive Industry? If so, can you tell whether the Industry is in longrun equilibrium? Here is the table showing costs, revenues, and profits:

a. The firm should produce 5 or 6 units to maximize profit. b. T h e m arginal revenue and marginal cost are

Ambika Adhikari

EMBA FALL 2012

graphed in give figure. The curves cross at a quantity at 5 units. Thus the company should produce 5 units to maximize the profit. c. This industry is competitive because marginal revenue is the same for each quantity. The industry is not in longrun equilibrium, because profit is not equal to zero.