A clear concise response that answers each of the parts A through F will receive

Question

A clear concise response that answers each of the parts A through F will receive FULL points. Thank you in advance!

The diagram shows the cost and revenue curves for a bridge to a popular island. The marginal cost of crossing the bridge is zero and is indicated in the diagram m as the horizontal axis. The price is the toll to cross the bridge, and the output is the number of autos that cross the bridge each day.

(a) Assume that a private firm owns the bridge and maximizes profits. Based on the diagram, determine each of the following.

(i) Output (ii) Price (b) Now assume that a municipality owns the bridge and sets the price to achieve allocative efficiency. Based on the diagram, determine each of the following. (i) Output (ii) Price(c) At a price of $1, is the municipality%u2019s accounting profit positive, negative, or zero? Explain.

(d) Suppose that the municipality sets a break%u2010even price that generates revenues to just cover all economic costs.

(i) Based on the diagram, determine the break%u2010even output.

(ii) At the output you determined in part iii), is the demand relatively elastic, relatively inelastic, ,unit elastic, perfectly elastic, or perfectly inelastic?

(e) If a company begins to provide access to the island via commercial watercraft, what will happen to each of the following in the diagram?

(i) The demand curve for bridge crossings (ii) The profit%u2010maximizing output

(f) Suppose the long%u2010run average total cost is strictly downward sloping. Would it be efficient to build a second bridge? Explain

Explanation / Answer

A) when private firm owns it will set highest price = 8 at quantity Q1

So output is Q1 and price is 8

B)When muncipality owns bridge output = Q3 and price = 1 to have allocative efficiency.

C)At price $1 municpality profit would be zero as it would recover average total cost only. This is because it is called allocative efficiency as the muncipality aim is maximize social benefit so it only takes avarege total cost to make profit ZERO.

d) i) break even output = Q2 at price 7 where marginal revenue = marginal cost.

    ii) Demand at this point is relatively inelastic

e) i) since there would increaed supply so demand curve will become horizontal.

   ii)Profit maximising output would be Q4

f) Yes it would be efficient to build second bridge if avrage total cost curves slopes downward in long run. Because in the long run firm will maximize profit by reducing avearge total cost.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.