Consider a simplified version of the “two-way” access pricing model studied in Section 5.3.2. Company D is a long-distance carrier which must access the local loop of a local carrier called company C. Company D is facing demand for its long-distance service from two groups of potential customers (where each consumer makes at most one phone call): A group of ηH high-income consumers who are willing to pay a maximum of 80c for a long-distance call; and a group of / ηL low-income consumers who are willing to pay a maximum of 20c for eachlong- / distance call. Let aDC denote the access charge carrier C levies on carrier D for each of D’s phone calls it carries on its local loop. Let pD denote the price of eachlong-distance call D charges it customers. Answer the following questions:

(a) Suppose that aDC = 0. Calculate the price of a long-distance phone call which maximizes the profit of carrier D. Your answer should depend on the relative values of ηH and ηL.

(b) Answer the previous question for all possible given access charges satisfying 0 < aDC ≤ 80, assuming that ηH < ηL/3.

(c) Suppose that ηH = 100 and ηL = 500. Calculate the access charge which maximizes the profit of carrier C.

(d) Is the outcome found in the previous question socially optimal? Hint: Since there is no externality, the First-Welfare Theorem applies, so you can think of marginal-cost pricing. If your answer is negative, is there any policy that the regulator can use to implement the socially-optimal outcome?