7) A for-profit firm is bidding on a contract that would make it the sole provider...

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7) A for-profit firm is bidding on a contract that would make it the sole provider of trash and recycling pick-up services in a city. The city-wide demand for trash and recycling pick-up is given by Q = 50,000 200P where Q is measured in tons of material picked up and P is the price per ton. That demand curve implies that the inverse demand (i.e., rewriting the demand equation with Q as a function of P) for trash and recycling pick-up is P=250 -0.0050. If the firm wins the contract, it will be able to choose price as a monopolist and its marginal revenue curve would be given by Page 1 of 3 MR = 250 -0,01Q. The firm's marginal cost is constant at $100 per ton, MC = 100, which implies that its total cost is directly proportional to Q. TC = 1000. a. What are the profit-maximizing price and quantity for the firm if it wins the contract? b. In a standard diagram with Q on the horizontal axis and P on the vertical axis, show your answer to part a. Be sure to show how both price and quantity are determined, and clearly label all relevant curves. Also, show the equilibrium price and quantity if this market were competitive. c. At the monopoly equilibrium from part a, calculate consumer surplus, producer surplus, and deadweight loss. Also, what would consumer surplus be under competition? d. What is the maximum amount the firm would be willing to bid for the contract? Assume that it will not be able to operate in the city unless it wins the bid and will therefore have no profit. e. A consumer advocacy group argues that granting this firm monopoly power hurts city residents/consumers. In response, a city commissioner announces that the firm's contract bid will go back to the residents/consumers in the form of lower taxes. In that case, the commissioner argues that consumers will not, in net, be hurt by the granting of monopoly power. Explain why the commissioner is wrong. (Hint: Your answers to parts c and d should factor into your explanation.) 7) A for-profit firm is bidding on a contract that would make it the sole provider of trash and recycling pick-up services in a city. The city-wide demand for trash and recycling pick-up is given by Q = 50,000 200P where Q is measured in tons of material picked up and P is the price per ton. That demand curve implies that the inverse demand (i.e., rewriting the demand equation with Q as a function of P) for trash and recycling pick-up is P=250 -0.0050. If the firm wins the contract, it will be able to choose price as a monopolist and its marginal revenue curve would be given by Page 1 of 3 MR = 250 -0,01Q. The firm's marginal cost is constant at $100 per ton, MC = 100, which implies that its total cost is directly proportional to Q. TC = 1000. a. What are the profit-maximizing price and quantity for the firm if it wins the contract? b. In a standard diagram with Q on the horizontal axis and P on the vertical axis, show your answer to part a. Be sure to show how both price and quantity are determined, and clearly label all relevant curves. Also, show the equilibrium price and quantity if this market were competitive. c. At the monopoly equilibrium from part a, calculate consumer surplus, producer surplus, and deadweight loss. Also, what would consumer surplus be under competition? d. What is the maximum amount the firm would be willing to bid for the contract? Assume that it will not be able to operate in the city unless it wins the bid and will therefore have no profit. e. A consumer advocacy group argues that granting this firm monopoly power hurts city residents/consumers. In response, a city commissioner announces that the firm's contract bid will go back to the residents/consumers in the form of lower taxes. In that case, the commissioner argues that consumers will not, in net, be hurt by the granting of monopoly power. Explain why the commissioner is wrong. (Hint: Your answers to parts c and d should factor into your explanation.)

Answer rating: 100% (QA)

a To find the profitmaximizing price and quantity Set MR MC and solve jointly MR P 001Q MC 100 P 001... View the full answer