Suppose that Verizon Wireless has hired you as a consultant to determine what price it should set for calling services.Suppose that an individual's inverse demand for wireless services in the greater Boston area is estimated to be P = 100 − 33Q and the marginal cost of providing wireless services to the area is $1 per minute.What is the optimal two-part price that you would suggest to Verizon?
A) Charge a fixed fee = $95.5 and a usage fee of $1 per minute.
B) Charge a fixed fee = $3 and a usage fee of $0.33 per minute.
C) Charge a fixed fee = $148.50 and a usage fee of $1 per minute.
D) Charge a fixed fee = $3 and a usage fee of $3 per minute.

Question

Quizplus · Accepted Answer

To determine the optimal two-part price, we need to use the formula P = MC + (FC/Q), where P is the price per minute, MC is the marginal cost per minute, FC is the fixed cost, and Q is the quantity of minutes used.

First, we need to solve for Q by setting the inverse demand equal to P: 
100 - 33Q = P

Next, we can substitute P into the two-part pricing formula and solve for FC: 
P = MC + (FC/Q) 
(100 - 33Q) = 1 + (FC/Q) 
99 = 1(Q) + FC/Q 
99Q = Q + FC 
FC = 98Q

Substituting FC back into the two-part pricing formula: 
P = MC + (FC/Q) 
P = 1 + (98Q/Q) 
P = 1 + 98 
P = 99

Therefore, the optimal two-part price is a fixed fee of $148.50 ($98Q) and a usage fee of $1 per minute, which means the answer is (C).

Suppose That Verizon Wireless Has Hired You as a Consultant