You are pricing manager for a cell phone company. You have two types of customers with different demand curves for your service. The demand curves for an individual customer for each group for hours of talk time per month are Type A Customer : P=10-2Q , Type B Customer : P=10-Q. Your marginal cost for providing hours of phone service is zero (all your costs are fixed). There are 1000 customers of each type. You know the demand curves for the two types of customers. However, it is impossible for you to identify when a person purchases a plan whether the customer is from one group or the other.
1. Design a menu plan that extracts all the consumer surplus from the type A customers and as much as possible from the type B customers given that they have the option to purchase your first plan (it might help to graph the problem). Each of the plan on the menu must offer the maximum number of hours of talk time per month for a fixed monthly fee. (hint: you can extract all the customer surplus from type A customer using two-part tariff. Such a plan can be express in terms of minutes at a fixed-price)
2. What are the total profits from offering the two plans?
3. What happens if you increase the monthly fee for the plan designed for the type B customers? Explain