Question

The city of Selma (like most other cities) contracts with a single garbage collection firm, Alamo Waste Inc., which has been given an exclusive franchise to pick up trash in the city. However, Mr. Foo L. Noone has proposed an alternative scheme. He suggests that the city government should divide the city into several, much smaller areas. Then it should allow numerous small companies that would like to get into the business of collecting trash to competitively bid for garbage collection in these areas. The government would then allow the lowest bidder to service the area.   

      Suppose that the city government has estimated the price residents are willing to pay for various numbers of garbage collections per month and the total costs per resident as shown in the following table.

Price per Pickup (P)	Number of Pickups (Q)	Total Revenue	Marginal Revenue	Total Cost	Marginal Cost	Average Total Cost
$4.20	0			$3.20
$3.80	1			$4.20
$3.40	2			$5.60
$3.00	3			$7.80
$2.60	4			$10.40
$2.20	5			$13.40
$1.90	6			$16.80

1. Complete the above table.

2. How much are the fixed costs per month of garbage collection per resident in any given        area?

C.   Given that the current garbage collection firm has a monopoly what is the current number of collections per resident and the price charged residents for each collection? What is the economic profit received from each resident by the monopoly firm. Show your work.

D. If competitive bidding were allowed and a competitive market for garbage collection services developed, what would be the number of collections per month and the price charged per resident per collection? What is the economic profit received from each resident by the competitive firms?

E.   Draw an appropriate graph of your solutions to parts B and C and insert your numbers onto the graph. Based on the above analysis should the city government implement Mr. Noone's proposal? Briefly explain your answer.

Answer 1

a)

Price/Pickup (P)	Number of Pickups (Q)	TR (P*Q)	MR (TR/Q)	TC	MC (TC/Q)	ATC (TC/Q)
4.20	0	0.00		3.20
3.80	1	3.80	3.80	4.20	1.00	4.20
3.40	2	6.80	3.00	5.60	1.40	2.80
3.00	3	9.00	2.20	7.80	2.20	2.60
2.60	4	10.40	1.40	10.40	2.60	2.60
2.20	5	11.00	0.60	13.40	3.00	2.68
1.90	6	11.40	0.40	16.80	3.40	2.80

b) fixed cost = $3.20 as this is the cost charged even though the number of pickups is zero
c) since the firm is behaving as a monopoly market thus its profit-maximizing level of production is where MR=MC. Thus required number of pickups is 3 as at this level of production MR=MC= $2.20 and the price charged at this level is $3.00.
economic profit = (P-ATC)*Q
                          = (3-2.60)*3 = $1.2

d) in a competitive market firm will produce at the level where MC=ATC.
thus in a competitive market, the number of collections per month is 4 and the price charged per resident per collection is $2.60
economic profit = (P-ATC)*Q
                          = (2.60-2.60)*4 = 0 (zero economic profit)