Question

A) Please set up The Simultaneous Equations for both plans and solve for the breakeven point where Plan A and Plan B will have the same cost outlay.

( B)Which plan will be cheaper in the short run and which plan will be cheaper in the long run? Please show Graph.

Answer 1

Let N denotes the number of call minutes per month.

a)

Fixed Charges for plan A=F_A=$30

Variable call charges=V_A=0.12 per minutes

Total cost for plan A=TC_A=F_A+V_A*N=30+0.12*N

Fixed Charges for plan B=F_B=$60

Variable call charges=V_B=0.06 per minutes

Total cost for plan B=TC_B=F_B+V_B*N=60+0.06*N

TC_A=30+0.12N

TC_B=60+0.06N

Set TC_A=TC_B

30+0.12N=60+0.06N

30=0.12N-0.06N

N=500 call minutes

At 500 call minutes both plans will have the same cost outlay.

b)

We can develop the following schedule to draw a graph in the given case.

o. of Call	Plan A	Plan B
Minutes, N	30+0.12N	60+0.06N
0	30	60
100	42	66
200	54	72
300	66	78
400	78	84
500	90	90
600	102	96
700	114	102
800	126	108
900	138	114
1000	150	120

Following graph may be made to depict the cost outlays for both the plans at different level of call minutes. We find that line for plan A falls below the line for plan B for N<500. It means that plan A is economical in short run i;e below 500 call minutes. Line for plan B is above the line for plan A for N>500 i.e. plan B is economical in long run i.e. above 500 call minutes. A consumer will be indifferent at 500 minutes calls.