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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

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?

b. In light of your answer to (a), how many minutes with each provider would your friend talk on the phone?

c. How much would she end up paying each provider every month?

d. How much consumer surplus would she 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?

Subpart (a):

To determine
Equilibrium quantity and price.

Explanation

The cost of a phone call to the provider A is zero because they charge a fixed amount of $120 and no additional cost to phone call minutes. Thus, the cost of an additional minute call on the service provider 1 is $0...

Subpart (b):

To determine
Equilibrium quantity and price.

Subpart (c):

To determine
Equilibrium quantity and price.

Subpart (d):

To determine
Consumer surplus.

Subpart (e):

To determine
select the alternative.

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