The utilities commission in a city is currently examining pay telephone service in the city. The commission has been asked to evaluate a proposal by a city council member to place a $0.10 price ceiling on local pay phone service
The staff economist at the utilities commission estimates the demand and supply curves for pay telephone service as follows: QD = 1600 - 2400P QS = 200 + 3200P, where P = price of a pay telephone call, and Q = number of pay telephone calls per month. a. Determine the equilibrium price and quantity that will prevail without the price ceiling. b. Analyze the quantity that will be available with the price ceiling (in the long-run). c. The city council realizes that the telephone company could curtail pay phone service in response to the ceiling. To prevent this, the council plans to impose a requirement that the telephone company must maintain the current number of pay phones. In light of this additional restriction, what will be the likely impact of the price ceiling?
a.
Set QD = QS.
1600 - 2400P = 200 + 3200P
1400 = 5600P
P = $0.25
Substitute into QD.
QD = 1600 - 2400(0.25 )
QD = 1000
b.
QS = 200 + 3200(0.10 )
QS = 520
QD = 1600 - 2400(0.10 )
QD = 1360
There will be a shortage of 1360 - 520 or 840 calls.
c.
The telephone company would be expected to allow service to decline by not servicing broken phones, placing the required phones in very easily reserviced areas, and otherwise reducing the cost of complying with the requirement.
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