Posted by **Eric** on Monday, April 28, 2008 at 11:21pm.

Imagine that the efficient provision of telephone calls in a medium-sized city involves an initial investment of $100 million financed by borrowing at 6 percent and variable cost of 5 cents a phone call. The phone company's annual fixed cost would be $6.0 million (6.00 percent of $100).

A) Use this info about costs to plot marginal cost and average total cost.

B) Assume that regulators set price at 5 cents, the level of marginal cost. What is the firm's profit position if 60 million calls a year are demanded at that price?

C) Is setting price equal to marginal cost a viable option in this case? Why or why not?

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