QUESTION 1

Digicom is a wireless services company with a monthly demand for cell phone minutes for each client that can be expressed as follows:

P = $2 - 0.02Q

Where P is the price paid by the client per minute and Q is the number of minutes bought by the client each month.

The marginal cost is $0.20 per minute.

Assume thatDigicom offers a single per minute price, which means that the price per minute is the same for all clients, regardless of the number of minutes they actually use each month.

• What is the profit-maximizing quantity and price? (5 points)
• What is the profit per client? (5 points)
• What is the consumer surplus? (5 points)

Assume now thatDigicom offers a two-part tariff with a monthly fixed fee and a per minute charge.

• What is the optimal two-part tariff? (5 points)
• What is the profit per client? (5 points)
• How many minutes are used per month for each client? (5 points)