This is 1 question with 2 parts. PLEASE USE NOTES TO ANSWER THE QUESTIONS.

QUESTION:

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10.3

10.4

5 Figure 10.3 shows that an ambitious commercial photocopy service manager wants to get more business by decreasing the price from $0.10 to $0.05 per copy. Answer the following questions: a How many more photocopies are made after the price decrease? b How much is the deadweight loss in terms of dollar amount? 6 Figure 10.4 shows a large metropolitan museum's operations a At the marginal cost=$1.00, the number of patron served has increased from 11,000 to 12,000. How much is the deadweight loss in terms of dollar amount b At the marginal cost=$1.20, the number of patron served has decreased from from 10,000 to 8,000. How much is the deadweight loss in terms of dollar amount c As the museum's director, you want to serve the community as much as you can at reasonable cost. Would you prefer increasing the number of patrons served or would you prefer increasing user fees? d Explain Why? If the price is set below $0.10 too many copies would be made and MC>MB (see figure 10.3) The supplier must pay for the loss Figure 10.3 The price is set at $0.05 per copy Price per copy Shaded area is the deadweight loss $0.20 Demand Marginal Cost $0.10 Down below $0.10 $0.05 Shift to right by 0.5 M Photocopies in millions 2 2.5 Figure 10.4 Marginal cost of pricing -marginal cost of many information products Is so low that it is not economical to charge user fees Example Figure 10.4: marginal cost of serving patrons Charging user fees or not? That is the question here: three scenarios: 10.4 The deadweight loss from Charging User Fee Demand The deadweight loss From serving 1,000 more Patrons Marginal cost + User Fee $1.20 I Marginal Cost $1.00 11,000 Number of Patrons Served 9,000 10,000