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=150−50PQD=150−50P , where PP is the price of a minute.a. With each providers, 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 the phone with each provider?c. How much would he end up paying each provider every month?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.)e. Which provider would you recommend that your friend choose? Why?

Answer 1

Answer / Explanation:

To properly answer this question, we will first define some key terms which includes:

Surplus: This can be refereed to as an amount exceeding a particular requirement after it has been met.

Demand: This can be refereed to as the quantity of goods and serves a consumer or an individual is willing and pay for per time.

Now that we understand the basic concept above, we now refer back to the narrative of the question to try and answer t hem.

(a) With Provider A, the cost of an extra minute is $0. With Provider B, the cost of an extra minute is $1.

(b) With Provider A, my friend will purchase 150 minutes [= 150 – (50)(0)]. With Provider B, my friend would purchase 100 minutes [= 150 – (50)(1)].

(c) With Provider A, she would pay $120. With Provider B, he would pay $100.

(d) The figure below shows the friend’s demand. With Provider A, she buys 150 minutes and her consumer surplus is equal to (1/2)(3)(150) – 120 = 105. With Provider B, her consumer surplus is equal to (1/2)(2)(100) = 100

(e) I would recommend Provider A because she receives greater consumer surplus when buying from that provider.