You are designing a cell phone plan. The graph needs to show the demand curve for an individual for phone calls. For example, the demand curve shows that this person would not make any calls if the cost of a call exceeds $1.00 per minute, and they would make 1000 minutes of calls per month if calls are free. The graph also shows that the Marginal Cost (MC) of providing a minute of phone calls is $0.20.

You are considering three different versions of phone plans for this customer.

1) The first phone plan has the customer pay for each minute that they call.What price/minute of calls will maximize your profit? (This is our standard monopoly pricing.) Show the result graphically.On the graph, shade the area representing optimal profit.(Suppose FC=0, so producer surplus and profit are the same here.). Don't get hung up on all the numbers. Just highlight things properly.

2) The second phone plan that you are considering is a standard two-part tariff scheme where the customer pays a monthly fee and a price/minute for calls.What monthly fee and price/minute will maximize your profit?Show both on a graph and identify the area on your graph that represents profit with the optimal two-part tariff scheme.

3) The third phone plan is like a two-part tariff scheme since it involves a monthly fee. But instead of a cost/minute for actual calls, it imposes a limit on the number of calls the customer can make in a month. So plan #3 requires specifying two numbers: 1) a monthly fee; and 2) a maximum number of minutes per month. For our customer, what fee and maximum number of minutes will maximize profit?What is the optimal profit?On your graph, shade the area representing the fee that you propose.

4) Compare the second and third plans.