1. [10 points] Suppose the demand curve representing phone calls placed by Michc
ID: 1157011 • Letter: 1
Question
1. [10 points] Suppose the demand curve representing phone calls placed by Michconsin Electronics (ME) remains unchanged over time and is linear. ME currently uses MCI for phone calls and places 100 calls per month at a price of $0.80 per phone call. ME used to subscribe to AT&T and placed 90 calls per month at a price of $.90 per phone call, but switched to MCI to take advantage of the lower price. To lure customers like ME, AT&T recently modified its pricing structure to the following: $1.00 per call for the first 60 calls, $.80 per call for the next 40 calls, and $.50 per call for all remaining calls. Calculate the change in consumer surplus for ME if ME switches back to AT&T.
Explanation / Answer
Cost of calls = number of calls x price per call
Current cost of 100 calls for ME using MCI= 100 x 0.80= $80 per month( Average of $ 0.80 per call)
New AT& T price for first 100 calls= (1.00 X 60) + (0.80 x 40) = 60 + 32 = $92 (Average of $ 0.92 per call)
Consumer surplus if ME switches back from MCI to AT&T = 0.80 -0.92= (- 0.12 per call)
If the consumer switches to AT&T again the consumer surplus is negative, which can only occur when the consumer is either misinformed, tricked or makes a mistake.
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