UA EC 110 - EC 110 Lab THANKSGIVING WEEK Problems SOLUTIONS (3 pages)

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EC 110 Lab THANKSGIVING WEEK Problems SOLUTIONS



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EC 110 Lab THANKSGIVING WEEK Problems SOLUTIONS

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Pages:
3
School:
University of Alabama
Course:
Ec 110 - Prin of Microeconomics

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EC 110 THANKSGIVING WEEK HANDOUT Problems SOLUTIONS In this problem set we will do two things First we look at another monopoly situation that can be treated like a natural monopoly and then we move on to a new market structure monopolistic competition 1 A company is considering the possibility of constructing a bridge across the Black Warrior River in an isolated area but where there is a lot of traffic The bridge will cost 2 million dollars to build but there are no maintenance costs and making an heroic assumption the bridge will last forever The table below details the demand for bridge crossings over the lifetime of this bridge Price per Crossing 8 7 6 5 4 3 2 1 0 Number of Crossings in Thousands 0 100 200 300 400 500 600 700 800 TOTAL REVENUE 0 700 000 1 200 000 1 500 000 1 600 000 1 500 000 1 200 000 700 000 0 MARGINAL REVENUE 7 5 3 1 1 3 5 7 a If the bridge is constructed what is the profit maximizing price Assuming that it is has been constructed since there are no maintenance costs no variable costs this implies that marginal cost MC is 0 In this case so long as marginal revenue MR is greater than zero then the price should be lowered and output increased Another way to say this is that you want to choose the output that maximizes total revenue At output levels up to 400 MR 0 but at output levels higher than this MR 0 So the profit maximizing output would be at Q 400 or 400 000 b What is the efficient level of output Would the bridge company produce this output Why or Why not Efficiency occurs where the output is produced at which P MC Since MC 0 then the efficient price would also be zero which maximizes the number of crossings A private profit maximizing bridge company would never willingly choose to do this This is another version of the NATURAL MONOPOLY situation where the natural monopolist will never willingly choose to produce the efficient output level because it cannot cover its costs at that output level P LRAC here when P LRMC c Given the



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