Question

Assume your city government has been contacting with a single garbage collection firm that has been granted an exclusive franchise, the sole right, to pick up trash within your entire city limits. However, it has been proposed that companies be allowed to compete for business with residents on an individual basis. The city government has estimated the price residents are willing to pay for various numbers of garbage collections per month and the total cost facing the garbage collector per resident as shown in the following table.

Pickup (Q)	Price/Pickup	Total Revenue (TR)	Marginal Revenue (MR)	Total Cost (TC)	Marginal Cost (MC)	Average Total Cost (ATC)
0	$4.20	0	---	$3.20	---	---
1	$3.80			$4.20
2	$3.40			$5.60
3	$3.00			$7.80
4	$2.60			$10.40
5	$2.20			$13.40
6	$1.90			$16.80

Complete the table above, then answer the following questions

1. What are the fixed costs per month of garbage collection per resident? Explain your answer
2. Considering that the current garbage collection firm the city has contracted with has a monopoly in garbage collection services, what is the current number of collections residents receive per month and the price charged residents for each collection? What is the economic profit received from each resident by the monopoly firm? (Note: Profit received form individual resident must be calculated a per unit basis)
3. If competitive bidding were allowed and therefore a competitive market for garbage collection services developed, what would the number of collections per month and the price charged residents per collection? What is the economic profit received from each resident by the competitive firm? (Note that in a competitive market (chapter 13), P=MC=MR)
4. Based on the above analysis, should the city government allow competitive bidding? Why? Would you expect there to be any quality differences between the monopolistic and competitive trash collection firms?

last column is not missing, info is all here to my knowledge

Answer 1

Total Cost (TC) is the sum of fixed costs (FC) and variable costs (VC). A firm has to incur fixed costs even when the total ouput is zero whereas variable costs only occur when once the firm starts to produce output. Since in the given table, TC is equal to $3.20 when the quantity produced is 0, we can say that fixed costs per month of garbage collection per resident is $3.20.  

For a monopolist, the profit-maximizing condition is MR=MC and MC<price. This condition is getting fulfilled at Q=3 where MR=$2.20=MC and MC is less than the price. ($2.20<$3.00)

Hence, if the firm acts as a monopolist, the current number of collections residents receive per month is 3 and the price charged for each collection is $3.00.

Calculating economic profit at this profit-maximizing quantityand price

ATC= TC/Q

= 7.80/3

= 2.60

Profit per unit= P-ATC

= 3.00-2.60

= 0.40

Hence, economic profit received from each resident by the monopoly firm is $0.40