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The phone network says it loses money on local calls, because the $20 average monthly bill...

The phone network says it loses money on local calls, because the $20 average monthly bill does not cover its average cost of $30. It estimates that $18 of costs are directly related to local service, with $12 the share from overall expenses (overhead). Why would the phone network be willing to operate if it is losing money?
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Answer #1

The average fixed cost in this case, is $12 and the average variable cost is $18. Together they make up an average total cost of $30. It is quite obvious that the average revenue of $20 is giving a loss of $10 over an average cost of $30. But if we compare the average revenue with average variable cost only, we find that the current pricing system is able to cover the average variable cost. This is because $20 is greater than $18.

the phone network is willing to operate even when it is losing money because it is able to cover the variable cost of production. this happens when the price is greater than the average variable cost and this is true in this case. the phone network will not operate as soon as the price will fall below the average variable cost which is $18.

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