The phone network says it loses money on local calls, because the $20 average monthly bill does not cover its average cost of $30 . It estimates that $18 of costs are directly related to local service, with $12 the share from overall expenses (overhead). Why would the phone network be willing to operate if it is losing money?

Answer 1

The phone company would save $18 in costs per customer by shutting down but would sacrifice $20 in revenue. Hence, it is better off operating, earning $2 over costs related to local service. Local phone service is actually contributing to profits, since overhead would be unchanged even if local phone service were discontinued.