AT&T. It is early in the days of cellular (or mobile) telephony, and you are the price manager for AT&T's cell phone plan. It has been determined that there are two market segments: low-value consumers and high-value consumers. For simplicity, assume that all consumers within a segment are identical. A consumer in the low-value segment has monthly demand (measured in number of minutes) of Q₁ (p) = 80 - p, and a consumer in the high-value segment has monthly demand of QH (P) = 100 -p, where p is in cents per minute. a. Assume AT&T charges a flat price per minute with no membership fee. Derive the expression for consumer surplus for a low-value consumer and for a high-value consumer as a function of the price, p. Low-value consumer surplus, CS, (p) = High-value consumer surplus, CS, (p) = Show Transcribed Text Assume AT&T's marginal cost is a constant 10 cents per minute. You have decided to use a two-part tariff and must choose the monthly fixed fee f and the per-minute charge p. There are 1,000,000 consumers of which a fraction a are low-value consumers. These assumptions also apply to parts (b)-(d). b. Suppose all 1,000,000 consumers are low-value consumers (so a = 1). Find the profit- maximizing two-part tariff; i.e., profit-maximizing values for p and f. Also calculate the associated monthly profit. Optimal per-minute charge, p = Optimal monthly fixed fee f = Profit per month= c. Suppose all 1,000,000 consumers are high-value consumers (so a = 0). Find the profit-
AT&T. It is early in the days of cellular (or mobile) telephony, and you are the price manager for AT&T's cell phone plan. It has been determined that there are two market segments: low-value consumers and high-value consumers. For simplicity, assume that all consumers within a segment are identical. A consumer in the low-value segment has monthly demand (measured in number of minutes) of Q₁ (p) = 80 - p, and a consumer in the high-value segment has monthly demand of QH (P) = 100 -p, where p is in cents per minute. a. Assume AT&T charges a flat price per minute with no membership fee. Derive the expression for consumer surplus for a low-value consumer and for a high-value consumer as a function of the price, p. Low-value consumer surplus, CS, (p) = High-value consumer surplus, CS, (p) = Show Transcribed Text Assume AT&T's marginal cost is a constant 10 cents per minute. You have decided to use a two-part tariff and must choose the monthly fixed fee f and the per-minute charge p. There are 1,000,000 consumers of which a fraction a are low-value consumers. These assumptions also apply to parts (b)-(d). b. Suppose all 1,000,000 consumers are low-value consumers (so a = 1). Find the profit- maximizing two-part tariff; i.e., profit-maximizing values for p and f. Also calculate the associated monthly profit. Optimal per-minute charge, p = Optimal monthly fixed fee f = Profit per month= c. Suppose all 1,000,000 consumers are high-value consumers (so a = 0). Find the profit-
Chapter5: Price Elasticity Of Demand And Supply
Section: Chapter Questions
Problem 17SQ: Suppose Sally buys exactly five bars of English toffee each week, regardless of whether the toffee...
Related questions
Question
Transcribed Image Text:AT&T. It is early in the days of cellular (or mobile) telephony, and you are the price manager for
AT&T's cell phone plan. It has been determined that there are two market segments: low-value
consumers and high-value consumers. For simplicity, assume that all consumers within a segment
are identical. A consumer in the low-value segment has monthly demand (measured in number of
minutes) of Q, (p) = 80 - p, and a consumer in the high-value segment has monthly demand of
QH (P) = 100 -p, where p is in cents per minute.
a. Assume AT&T charges a flat price per minute with no membership fee. Derive the
expression for consumer surplus for a low-value consumer and for a high-value consumer as
a function of the price, p.
Low-value consumer surplus, CS, (p): =
High-value consumer surplus, CS, (p) =
Show Transcribed Text
Assume AT&T's marginal cost is a constant 10 cents per minute. You have decided to use a two-part
tariff and must choose the monthly fixed fee f and the per-minute charge p. There are 1,000,000
consumers of which a fraction a are low-value consumers. These assumptions also apply to parts
(b)-(d).
b. Suppose all 1,000,000 consumers are low-value consumers (so a = 1). Find the profit-
maximizing two-part tariff; i.e., profit-maximizing values for p and f. Also calculate the
associated monthly profit.
Optimal per-minute charge, p =
Optimal monthly fixed fee =
Profit per month =_
c. Suppose all 1,000,000 consumers are high-value consumers (so a = 0). Find the profit-
maximizing two-part tariff, and calculate the associated.
Optimal per-minute charge, p =
Optimal monthly fixed fee, f =
Ċ
Profit per month =
Show Transcribed Text
J
Ĉ
d. Suppose 500,000 consumers are low value and 500,000 consumers are high value (so a =
0.5). In no more than three or four sentences, explain what the optimal two-part tariff will
look like relative to the answers in part b) and c) - and why.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics 2e
Economics
ISBN:
9781947172364
Author:
Steven A. Greenlaw; David Shapiro
Publisher:
OpenStax
Microeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506893
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning