Question

In: Economics

1. You are a manager of a telephone service provider in Sydney. You have two plans...

1. You are a manager of a telephone service provider in Sydney. You have two plans for your customers as follows:

Plan 1: Bill = 15 + 0.05 T; and Plan 2: Bill = 25 + 0.03T. Where, ‘Bill’ is your monthly bill in dollars and ‘T’ is your monthly total duration of calls in minutes. (a) Find the break-even level of total duration of monthly telephone calls in minutes.

(b) If your customer’s average monthly duration of call is 400 minutes, advise which plan would be suitable for your customer?

(c) If your customer’s average monthly duration of call is 600 minutes, advise which plan would be suitable for this customer?

(d) If there is a $5 reduction in the monthly fixed fee in Plan 2, then what would be your advice to the customer whose average monthly call is 400 minutes?

Expert Solution

a)

For breakeven, Set

Bill under plan 1=Bill under plan 2

15+0.05T=25+0.03T

0.02T=10

T=500 minutes (Break even level of total duration)

b)

If T=400

Bill under plan 1=15+0.05T=15+0.05*400 =$35

Bill under plan 2=25+0.03T=25+0.03*400 =$37

We can see that bill under plan 1 is lower. Plan 1 is better

(We can also see that usage of 400 minutes is lower than the breakeven usage. so, plan with lower fixed cost and higher variable cost i.e. plan 1 is better.)

c)

If T=600

Bill under plan 1=15+0.05T=15+0.05*600 =$45

Bill under plan 2=25+0.03T=25+0.03*600 =$43

We can see that bill under plan 2 is lower. Plan 2 is better

(We can also see that usage of 600 minutes is higher than the breakeven usage. so, plan with higher fixed cost and lower variable cost i.e. plan 2 is better.)

d)

Now plan 2 is changed as under

Plan 2, Bill=(25+0.03T)-5=20+0.03T

If T=400

Bill under plan 1=15+0.05T=15+0.05*400 =$35

Bill under new plan 2=20+0.03T=20+0.03*400 =$32

We can see that bill under new plan 2 is lower. Plan 2 is better.

Rahul Sunny answered 7 months ago

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