Suppose that Pattys Pool has the demand data given in Table in the chapter. Further, suppose that Patty has just two types of costs: (1) rent of $25 per day and (2) towel service costs equal to 50 cents per swimmer. Over the short run, rent is a fixed cost (Patty has a lease she cant get out of), but towel service is a variable cost (it varies with the number of swimmers). Pattys marginal cost is therefore constant at 50 cents.

a. Under these cost conditions, what are Pattys short-run profit-maximizing output and price? What is her profit or loss per day?

b. Now suppose that, in addition to the costs just described, the town imposes a swimming excise tax on Pattys Pool equal to $2 per swimmer. What are Pattys new short-run profit maximizing output and price? What is her new profit per day?

c. In addition to the costs just described (including the swimming excise tax of $2 per swimmer), suppose the town imposes a fixed swimming tax requiring Patty to pay $2 per day for operating her pool, regardless of the number of swimmers. What are Pattys new short-run profit-maximizing output and price? What is her new profit per day?

d. Now suppose that costs are as in (c), except that the fixed swimming tax is $5 per day instead of $2 per day. What are Pattys new short-run profit-maximizing output and price? What is her new profit per day?

e. With the $5 per day fixed swimming tax, what should Patty do in the short run? If Pattys long run costs are the same as her short-run costs, what should she do in the long run?

f. Based on your answers to b, c, d, and e, assess the following statement: When an excise (variable) tax is imposed on a monopoly, it will pass part, but not all, of the tax on to consumers in the form of a higher price. But a fixed tax has no effect on monopoly behavior over any time horizon. Are both of these sentences true? Explain briefly.

Transcribed Image Text:

Perfect Competition Competition Oligopoly Monopolistic Monopoly ASSUMPTIONS Number of firms Output of different firms View of pricing Barriers to entry or exit? Strategic interde- Very many Standardized Differentiated Standardized or _ Many One differentiated Price taker Price setter Price setter Price setter No No PREDICTIONS Through strategic interdependence Positive, zero, or negative Positive or zero Maybe, if differentiated product Price and output decisions MC = MR MC=MR Short-run profit Positive, zero, or negative r negative Positive, zero, Positive, zero, or negative Positive or zero Long-run profit Zero Advertising? Never Zero Almost always