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Homework answers / question archive / Assume that you own the only phone company in a small town and there is one resident of the town who can only buy from you (fortunately they don't know they could hold out for a better deal)

Assume that you own the only phone company in a small town and there is one resident of the town who can only buy from you (fortunately they don't know they could hold out for a better deal). That resident's monthly demand for long distance minutes is . Your cost for providing these minutes is .

a)If you can only charge a single per-minute price, what is the optimal price per minute for you to charge in order to maximize profits?

b)You hire an economic consultant and she suggests that you could increase profits by charging a monthly access fee for long distance and a per minute usage fee? What would be the monthly and per unit fees that would maximize profits?

c)Qualitatively, without using math, compare the size of the deadweight loss under each of the two pricing schemes from parts a and b. Is the loss different? Why or why not?