Question

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

What are the fixed costs per month of garbage collection per resident? Explain your answer

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)

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)

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?

Answer 1

The table is filled as under:

Pickup (Q)	Price per Pickup (Demand)	Total Revenue (TR)=P*Q	Marginal Revenue (MR)= TR2-TR1	Total Cost (TC)	Marginal Cost (MC)= Change in TC/Change in Q	Average Total Cost (ATC)= TC/Q	Profit (P) = TR-TC
0	4.2	0	-	3.2	-	-	-3.2
1	3.8	3.8	3.8	4.2	1	4.2	-0.4
2	3.4	6.8	3	5.6	1.4	2.8	1.2
3	3	9	2.2	7.8	2.2	2.6	1.2
4	2.6	10.4	1.4	10.4	2.6	2.6	0
5	2.2	11	0.6	13.4	3	2.68	-2.4
6	1.9	11.4	0.4	16.8	3.4	2.8	-5.4

(a) Fixed costs per month = $3.2

The Total costs when there was nil production was $3.2, thus it will be the fixed cost every month.

(b) In a Monopoly, profit is maximized when MR=MC.

Thus, from the table above, MR=MC at Q=3, thereby earning a profit of $1.2

Therefore, the current number of collections residents receive per month is 3 and the price charged residents for each collection is $3.

(c) The economic profit received from each resident by the monopoly firm is $1.2

(d) In a competitive industry, profit is maximized at that level of output where P=MC. From the table above, at Q=4, Price= $2.6 and profit =$0.

Thus, the number of collections per month is 4 and the price charged residents per collection is $2.6 and the economic profit received from each resident by the competitive firm is $0.

(e) Yes, the city government should allow competitive bidding to restrict monopoly. Firms in competitive market provide for better quality than in monopoly because in competition firms will work hard continuously to survive while in monopoly there is no other firm so they will not try to strive hard and will provide poor quality.