A friend of yours is considering two cell phone service providers. Provider A ch
ID: 1253635 • Letter: A
Question
A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service 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 friend's monthly demand for minutes of calling is given by the equation QD= 150 - 50P, where P is the price of a minute.
a. With each provider, what is the cost to your friend of an extra minute on the phone?
Provider A $
Provider B $
b. In light of your answer to (a), how many minutes would your friend spend on the phone with each provider?
Provider A minutes
Provider B minutes
c. How much would he end up paying each provider every month?
Provider A $
Provider B $
d. How much consumer surplus would he obtain with each provider? (Hint: Graph the demand curve and recall the formula for the area of a triangle.)
Provider A $
Provider B $
e. Which provider would you recommend that your friend choose?
Explanation / Answer
a. A=0 B=1 b. A=150min B=100 c. A=120 B=100 d. A=150x3/2-120=105 B=100x2/2=100 e. A, because of d. Surplus of consumer is the amount that he save because he can purchase a product for a price that is less than he would be willing to pay. For example he is willing to pay almost $3 for the first minute, but he can pay only $1 or zero, so $2 (resp. 3 $) are his surplus from the first minute. Graphically, his surplus is a area between his demand (wich is straight) and the line of price( straight parallel to x) So in A it is content of triangle [0;3] [0;0] [150;0] (noted as [x;y], x=number of minutes; y price) and you have subtract $120 fix charge in B it is content of triangle [0;3] [0;1] [100;1] Hope this helps! Rating appreciated!