3. Tulip urowing is a The market price of tulip is $25 a n week. The avernge tot

Question

3. Tulip urowing is a The market price of tulip is $25 a n week. The avernge total cost of producinu wlips is 520 a tnanch, wnd ww 15 a bunch, Minimums asernge varitle cost is $12-1 bunch. (25%) variable cost in tt lustrates the situation (Me, MR, AT-Ayc) (5%) ty, what is the conomic profit that each grower is making in tho short run? (10%) e. W hat is the price at the grower's shutdown point? (5%) d. What is each grower's economic profit at the shutdlown pointt (5vo rite your Be precise 4. A company is considering building a bridge across a river. The bridge would co $2 million to build and nothing to maintain (marginal cost eqpuals zero). The following table shows the company's anticipated dermand over a. If the company were to build the bridge, what Quantity upplied day) 110 30 the lifetime of the bridge: (25%) Prhee DY e thewsanas would be its profit-maximizing price? Would that be the eficient level of output? Why or why not? ( 10%) 200 300 b. If the company is interested in maximizing profit, 500 should it build the bridge? What would be its profit or loss. (596) 600 100 800 e. If the government were to build the bridge, what price should it charge? (5%) d. Should the government build the bridge? Explain. (5%)

Explanation / Answer

MR = Change in TR/ change in Q

(a) If the company were to build the bridge ,the profit maximising price is where MR=MC. It is given that MC=0. We can see from the table that MR=MC , when P= $4 and Q=400 thousands . Because when Q=500 thousands , then MR<MC , which represents loss. Hence, profit maximising price is where revenue is maximised i.e at P=$4.

Efficient level of output is where P=MC . Therefore, efficient output level is Q=800 thousands.where P=MC=0.

Profit maximising quantity is lower than the efficient quantity because the firm is a monopolist.

(b) If the company is interested in maximising profit , then it should not build the bridge because its profits are negative. Total revenue when Q=400 thousands is $1600,000. And total cost is given =$ 2,000,000. So, it would cause a loss of $(2,000,000 - 1,600,000) = $ 400,000.

(c) If the government wer to build a bridge , it should set price equal marginal cost to be efficient. But the marginal cost is zero, so the government should not charge people to use the bridge.

(d) Yes, the government should build tye bridge because it would increase the society's total surpus which is equal to (1/2)(8)(800,000) = $ 3,200,000 which exceeds the cost of building the bridge i.e $ 2,000,000.

P Q (thousands) TR=PQ ($ thousands) MR 8 0 0 - 7 100 700 7 6 200 1200 5 5 300 1500 3 4 400 1600 1 3 500 1500 -1 2 600 1200 -3 1 700 700 -5 0 800 0 -7

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