The utilities commission in a city is currently examining pay telephone service
ID: 1244222 • Letter: T
Question
The utilities commission in a city is currently examining pay telephone service in the city. The commission has been asked to evaluate a proposal by a city council member to place a $ 0.10 price ceiling on local pay phone service. The staff economist at the utilities commission estimates the demand and supply curves for pay telephone service as follows: D: Q = 1600 - 2400P S: Q = 200 + 3200P where P is the price of a pay telephone call, and Q is the number of pay telephone calls per month. a. Determine the equilibrium price and quantity that will prevail without the price ceiling. 1600-2400p=200+3200p p=.25 Q= 1600-2400(.25) = 1000 b. What quantity will be available with the price ceiling? c. The city council realizes that the telephone company could curtail pay phone services in response to the price ceiling. To prevent this, the council plans to impose a requirement that the telephone company must maintain the current number of pay phones. In light of this additional restriction, what will be the likely impact of the price ceiling?Explanation / Answer
1600 – 2400P = 200 + 3200P. P = $0.25 and Q = 1000
The price ceiling is $0.10. QD = 1600-(0.1*2400) = 1360; QS = 200 + (0.1*3200) = 520. The shortage is 1360-520 = 840 calls per month.
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