A local cell phone monopoly faces the following monthly inverse-demand for lines from a typical family: P = 100 – 20Q. The total cost to the monopoly is C(Q) = 20Q. This implies that the marginal monthly cost to the monopoly is $20 per line.
a. How many lines does a typical family buy and what is the price per line? (This is the standard monopoly problem.)
b. The firm is now considering offering a family plan, where a larger number of phone lines will be sold at a set price. What type of advanced pricing scheme does this represent?
c. How many phone lines will be part of the family plan and what will be the total cost to the family? Use the diagram below to illustrate how you find the total price and quantity of the plan. Use the same inverse-demand and cost functions from part a.
d. Divide the total price of the family plan by the number of phone lines (Q from part c) included in the family line to get a price per line. Compare this to your answer in part a. Discuss why this is strange and how the monopolist is able to pull it off.