Question

Suppose Wilwaukee Telecom offers its users the option of paying either (a) $2.00 per minute for telephone service or (b) a $225 flat charge for a year of unlimited toll-free calls. Consider a customer with an annual demand for telephone service of P = 11 – 0.1Q, where P is the price per minute and Q is the number of minutes of calls made per year. Calculate the consumer surplus for each of the plans (a) and (b).

Answer 1

Demand function, P = 11 - 0.1Q

The demand curve can be represented by the following curve refer the attached graph

Option A. Price = $ 2 per minute

At this price Quantity demanded will be

2 = 11 - 0.1Q

=> 0.1Q = 11 - 2 = 9

=> Q = 90 minutes.

Consumer surplus = (1/2)×(11 -2)×90 = $ 405

Plan B. When he pays $ 225 then he can talk unlimited minutes then the graph would as shown below

Consumer Surplus = (1/2)×(11-0)×110 - Cost

CS =(1/2)×11×110 - 225= $ 605 - 225 = $ 380

Consumer surplus of Plan A is greater than plan B. Thus select A.

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