Imagine that the effective delivery of telephone calls in a medium sized city is an initial investment?
Imagine the benefit effective phone calls in a medium sized city is an initial investment of $ 100 million financed by borrowing at 6 percent and the variable cost of 5 cents per call. The telephone company annual fixed cost would be $ 6.0 million (6.00 percent of $ 100) (30 points) (A) Use this information on the costs of tracing the marginal cost and average total cost. (B) Suppose that regulators set prices at 5 cents, the level of marginal cost. What is the position of the gain, if 60 million calls a year are needed at this price? (C) Is the pricing equal to marginal cost of a viable option this case? Why or why not? Any help would be greatly appreciated. Thanks!
(A) The marginal cost is given by 5 cents per phone call. Therefore, is constant and is plotted as a straight line parallel to the axis of measurement without phone calls. The marginal cost is constant, is also average variable cost. Thus, the total average cost is given by the equation, the ATC = $ (0.05 * Q 100 million.) / 100 = 0.05 Q / Q, where Q is the number Call million. The graph of this equation is represented as a continuous curve from left to right. But this is not a straight line: the average cost falls faster to the top and lower rates of increase in production .. Some points of the curve is given as follows: Q (M) ATC ($) 1 100.05 50 2.05 100 1.05 200 0.55 1000 20 000 10 000 0.06 0.15 0.055 (b). At a price equal to marginal cost of 5 cents, the company mnakes $ 3 million in sales versus $ 3 million in total variable costs. He a loss in the meaning that they do not earn enough to pay the interest or to recover the depreciation of plant and equipment and other overhead costs that had put in place to manage the business investment in fixed assets of 100 million dollars. (C) setting price equal to marginal cost will not make the operation Company on any claim vaiable because the average variable cost and marginal cost is constant and therefore revenue is always equal to the entire total and variable cost some part of the fixed remuneration. marginal cost burden of the costs, principle applies some of the growth curve of marginal costs.
Davos Annual Meeting 2008 – Evaluating Financial Risk
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