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ECO404 Managerial Economics Assignment 2 Solution Fall 2012

Pakistan Telecommunication Company Limited (PTCL) is a mega corporation
and a leading telecommunication authority of Pakistan. The corporation is the
backbone for country’s telecommunication infrastructure despite arrival of a
dozen other telecommunication corporations, including Telenor Corps and China
Mobile Ltd. In addition to wire line operations, PTCL also provides fixed line
service through its countrywide CDMA based WLL (Wireless Local Loop)
network, under the VFone brand name and cellular service under Ufone brand
name. PTCL Group’s profit after tax was Rs.11.5 billion in year 2012 which was
36% higher compared to the profit achieved last year. Despite high inflation,
devaluation of Pakistani currency, increased prices of fuel and power, and salary
increments were main factors to increase the overall operating expenses by 7%
compared to last year, PTCL has maintained its monopoly in providing land line
service over other emerging telecommunication companies. It has the largest
Copper infrastructure spread over every city, town and village of Pakistan with
over million installed lines. Suppose total revenue function of PTCL was
TR=500+750Q-0.5Q2 whereas total cost function was TC=6000+200Q+0.125Q2
for the year 2012. Further, quantity demanded and quantity supplied function for
the same year was Qd = 1200-200P and Qs = 120+400P respectively.
Requirement:
Part A:
Keeping in view the above information, calculate:
a) Competitive level of quantity (millions) and price (per minute) of land line
service provided by PTCL.
b) Monopolist level of quantity (millions) and price (per minute) of land line
service provided by PTCL.
Part B:
Graph all the above findings and calculate welfare loss from monopoly faced by
society in terms of producer welfare loss and consumer welfare loss with the help
of graph.
Solution:

TR = 500 + 750 Q – 0.5 Q^2

TC = 6000 + 200 Q + 0.125 Q^2

Qd = 1200 – 200 P

Qs = 120 + 400 P

 

So, according to above data

Qd = Qs

1200 – 200 P = 120 + 400 P

400P + 200P = 1200 – 120

600 P = 1080

P = 1.80

Putting P = 1.80 in the equation:

 

Qd = 1200 – 200 P

Qd = 1200 – 200 (1.80)

Qd = 840

Qs = 120 + 400 P

Qs = 120 + 400 (1.80)

Qs = 840

 

Putting quantity into the equation we will find the total revenue and total cost:

 

Revenue Equation:

TR = 500 + 750 Q – 0.5 Q^2

TR = 500 + 750 (840) – 0.5 (840) ^2

TR = 277,700

 

Cost Equation:

TC = 6000 + 200 Q + 0.125 Q2

TC = 6000 + 200 (840) + 0.125 (840) ^2

TC = 262,200

 

Profit = Total Revenue – Total Cost

Profit = 277,700 – 262,200

Profit = 15,500

 

 

Perfect Competeting Normal Profit:

 

 

 

Monoply:

 

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