Problems and Applications Q10

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=15050PQD=15050P, where PPis the price of a minute.

With Provider A, the cost of an extra minute is

. With Provider B, the cost of an extra minute is

.

Given your friend's demand for minutes and the cost of an extra minute with each provider, if your friend used Provider A, he would talk for

minutes, and if he used Provider B, he would talk for

minutes.

This means your friend would pay

for service with Provider A and

for service with Provider B.

Use the following graph to draw your friend's demand curve for minutes. Then use the green triangle to help you answer the questions that follow.

Note: You will not be graded on any changes you make to the graph.

DemandTriangle0204060801001201401601802005.004.504.003.503.002.502.001.501.000.500Price of MinutesQuantity of Minutes

Your friend would obtain

in consumer surplus with Provider A and

in consumer surplus with Provider B.

Given this information, which provider would you recommend that your friend choose?

Provider A

Provider B