Question

AT&T

Total cost = $4.6 billion

Opportunity cost of capital = 10%

Annual cost = $460 million

Expected demand = q = 425,000 – 60P

2. Calculate the expected annual profit that AT&T will earn if they price at service at $30/month, $60/month or $100/month. At which price do they maximize profit?

Answer 1

Total cost = $4.6 billion	Price	price per annum= Price x 12	Expected demand	total revenue = price per annum x expected demand	annual cost since 10% is the opportunity cost of capital	total profit = total revenue - total cost
Opportunity cost of capital = 10%	30	360	403400	145224000	46000000	99224000
Annual cost = $460 million	60	720	381800	274896000	46000000	228896000
Expected demand = q = 425,000 – 60P	100	1200	353000	423600000	46000000	377600000
the company would maximize its profit at $100 per month