1.John has been in the habit of mowing Willa\'s lawn each week for $20. John\'s
ID: 1178406 • Letter: 1
Question
1.John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement?
2. According to the mathematical laws that govern the relationship between average total cost and marginal cost, where must these two curves intersect?
3. Describe how government is involved in creating a monopoly. Why might the government create one? Give an example.
Explanation / Answer
1) If the tax is less than $10, there will exist a price at which both John and Willa will still benefit from the lawn-mowing arrangement. If the tax is $10, a price can be set which will leave John and Willa neither better off nor worse off from the lawn-mowing arrangement. If the tax is greater than $10, all possible prices will leave at least one of the parties worse off from the lawn-mowing arrangement.
2) The two curves will cross at the minimum point on the average total cost curve.
3) The government can create a monopoly by giving a single firm the exclusive right to produce some good. Monopolies are created for many reasons; one important one is the recognition that a single firm in industries characterized by high fixed costs can usually supply the entire market at a lower cost than multiple firms in the industry. Examples include most utility companies. The government also grants sole ownership of inventions through patent laws in order to help eliminate the market failure that is likely to otherwise occur in the markets for those goods.
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