Question

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 = 200 - 100P, where P is the price of a minute. How much consumer surplus would he obtain with each provider?

Answer 1

To calculate the consumer surplus, we need to find the difference between the maximum amount a consumer is willing to pay and the actual amount they pay. For provider A, the consumer surplus would be the same for any quantity of minutes used since it charges a fixed fee. For provider B, the consumer surplus can be calculated by finding the area between the price of each minute and the demand curve and summing it up for the total number of minutes used.

Step-by-step explanation:

Consumer surplus is the area above the market price and below the demand curve. To calculate the consumer surplus, we need to find the difference between the maximum amount a consumer is willing to pay and the actual amount they pay. In this case, for provider A, the consumer surplus would be the area between the price of each minute and the demand curve. Since provider A charges a fixed fee of $120 per month, the consumer surplus would be the same for any quantity of minutes used. For provider B, the consumer surplus can be calculated by finding the area between the price of each minute and the demand curve and summing it up for the total number of minutes used. Let's calculate the consumer surplus for both providers.

Provider A:

Consumer surplus = Maximum amount willing to pay - Actual amount paid

Maximum amount willing to pay = QD (quantity) * P (price per minute)

Actual amount paid = $120 (fixed fee)

Consumer surplus = QD * P - $120

Provider B:

Consumer surplus = Maximum amount willing to pay - Actual amount paid

Maximum amount willing to pay = QD (quantity) * P (price per minute)

Actual amount paid = QD (quantity) * $1 (price per minute)

Consumer surplus = QD * P - QD * $1