Problem 1: Consumer Surplus Application
Suppose that all consumers for a monthly internet service provider (ISP) haveidentical demand curves given by
p =5- 0.5y
where p is the price per TB (terabytes) and y is total TB used per month. The ISP charges a monthly ?xed amount, denote this F, plus an additional charge based on usage (= p*y). Assume that the pricing is also for fractional amounts of TB used ("pro-rate") - so if a consumer uses y =0.25TB in a month, they are charged 3 * .25 = $0.75 plus the ?xed monthly fee of F).
(a) If the ISP charges p = $3 per TB, but no additional ?xed monthly fee (F =0), how much will the consumer use in internet services each month?
(b) Suppose the ISP charges p = $0 per TB (that is, the plan allows unlimited use for one ?at fee) and a ?at monthly fee of F = $20, will the consumer purchase ISP services and how many TB per month will they use?
(c) What is the maximum amount the ISP could charge as a monthly fee (F)if it charges p = $1 per TB?
(d) Bonus: If the ISP wishes to maximize the revenues (= F +py), what fee and price should it set?