In: Economics
Doug is reviewing The Lease arrangements of 2Telecommunications Pplans for his business. Plan A has a fixed monthly charge of $30 and $0.12 per minute, while Plan B will assess a fixed monthly fee of $60 and $0.06 per minute.
( B)Which plan will be cheaper in the short run and which plan will be cheaper in the long run? Please show Graph.
Please show all work and graph
Let N denotes the number of call minutes per month.
a)
Fixed Charges for plan A=FA=$30
Variable call charges=VA=0.12 per minutes
Total cost for plan A=TCA=FA+VA*N=30+0.12*N
Fixed Charges for plan B=FB=$60
Variable call charges=VB=0.06 per minutes
Total cost for plan B=TCB=FB+VB*N=60+0.06*N
TCA=30+0.12N
TCB=60+0.06N
Set TCA=TCB
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.
No. 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.