3.According to a Wall Street Journal article \"MCI, in New Phone War Skirmish, F

Question

3.According to a Wall Street Journal article "MCI, in New Phone War Skirmish, Files Suit over AT&T Ad Claims," MCI was upset with AT&T over allegedly false claims that AT&T's service is cheaper than MCI's. Suppose that the typical consumer is a small business, Woodbrook Electronics. Woodbrook uses MCI as their long-distance carrier and currently places 100 calls per month. MCI charges a price of $0.80 per phone call. Woodbrook used to subscribe to AT&T and placed 90 calls per month at AT&T's old rate of $.90 per phone call, but switched to MCI to take advantage of the lower price. Based on this data, estimate the equation for Woodbrook's demand assuming it is linear.

Explanation / Answer

Let the linear demand curve be:

P = a - bQ where P: price, Q: Quantity & a, b: Constants

So, we have:

0.80 = a - 100b (1)

0.90 = a - 90b (2)

(2) - (1) gives:

0.10 = 10b

b = 0.1 / 10 = 0.01

So,

0.80 = a - (100 x 0.01)

0.80 = a - 1

a = 1.80

So, linear demand curve is

P = 1.80 - 0.01Q

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