Imagine cell phones are simple and the only thing consumers care about is minute
ID: 1180865 • Letter: I
Question
Imagine cell phones are simple and the only thing consumers care about is
minutes. Suppose a monopolist wireless company says, The cell phone and the first
6 minutes are free, and the price of each additional minute is $2."
Now suppose your demand for minutes is
q(p) = 10 - p
Now suppose the wireless company changes its pricing policy and says, "A
sign-up fee of $50 will get you a phone and up to 6 minutes of talk time. The
price for each additional minute is $2." (NOTE: This is slightly dierent from the
simpler two-part taris we have looked at in class, because price is not a straight
line, as shown above, but the same principles should apply.) What is your maximum
consumer surplus if you accept the deal? Will you accept it?
Explanation / Answer
Consumer surplus is the difference between the price a consumer is willing (and able) to pay for a good or service and the price which s/he actually paid, i.e. the market price.
So maximum num of minutes is when p=0 => q= 10
so maximum amount he is willing to pay is 6*0 + 4*2 = $8
new price = 50 + 4*2 = 58
hence MCS = -50 which is deficit..Hence its better not to accept the deal!