Always There Wireless is wireless monopolist in a rural area.There are 200 customers,each of whom has a monthly demand curve for wireless minutes of Q^d = 200 - 100P,where P is the per-minute price in dollars and Q is the number of wireless minutes.The marginal cost of providing the wireless service is $0.25 per minute.If Always There charges $0.50 per minute,how large of a fixed monthly fee can it charge and still persuade customers to buy their service? A) $200 B) $150 C) $225 D) $112.50

Question

Quizplus · Accepted Answer

To find the fixed monthly fee Always There can charge, we first calculate the consumer surplus at the price of $0.50 per minute. The demand equation is Q = 200 - 100P. Substituting P = $0.50 gives Q = 200 - 100(0.50) = 200 - 50 = 150 minutes. The maximum price consumers are willing to pay (where Q = 0) is P = $2.00 (from solving 200 - 100P = 0). The area of the consumer surplus triangle is 0.5 * base * height = 0.5 * 150 * (2.00 - 0.50) = 0.5 * 150 * 1.5 = $112.50. This is the maximum fixed fee Always There can charge without reducing consumer surplus to below zero, which would deter customers from buying the service.

Always There Wireless Is Wireless Monopolist in a Rural Area