Assignment
1) Price/Output Determination. The City of Ithaca, New York is considering two proposals to provide its city government the service of computer maintenance. First, a national computer maintenance and sales franchise has offered to purchase the city's computer equipment at an attractive price in return for an exclusive franchise on computer maintenance. A second proposal would allow several small companies to provide the service without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given department. The city would then allocate business to the lowest bidder.
The city has conducted a survey of its department to estimate the amount they would be willing to pay for various amounts of computer maintenance. The city has also estimated the total cost of service per department. Service costs are expected to be the same whether or not an exclusive franchise is granted.
A. Use the indicated price and cost data to complete the following table.
|
Hours of Computer Maintenance per Month
|
Price Per Hour
|
Total Revenue
|
Marginal Revenue
|
Total Cost
|
Marginal Cost
|
|
0
|
$75.00
|
|
|
$0
|
--
|
|
1
|
72.50
|
|
|
|
$50.00
|
|
2
|
70.00
|
|
|
|
50.00
|
|
3
|
67.50
|
|
|
|
50.00
|
|
4
|
65.00
|
|
|
|
50.00
|
|
5
|
62.50
|
|
|
|
50.00
|
|
6
|
60.00
|
|
|
|
50.00
|
|
7
|
57.50
|
|
|
|
50.00
|
|
8
|
55.00
|
|
|
|
50.00
|
|
9
|
52.50
|
|
|
|
50.00
|
|
10
|
50.00
|
|
|
|
50.00
|
B. Determine price and the level of service if competitive bidding results in a perfectly competitive price/output combination.
C. Determine price and the level of service if the city grants a monopoly franchise.
2) Price Fixing. Three leading toxic waste disposal companies have entered into a secret cartel to fix prices and allocate business in the upper Midwest. The marginal costs per unit for toxic waste disposal services are as follows:
|
Toxic Waste (000)
|
Ann Arbor Services, Inc. (A)
|
BIG Environmental, Ltd. (B)
|
Chicagoland Disposal, Inc. (C)
|
|
1
|
$10
|
$10
|
$ 5
|
|
2
|
15
|
10
|
10
|
|
3
|
20
|
15
|
15
|
|
4
|
25
|
20
|
20
|
|
5
|
30
|
25
|
25
|
A. Determine the cartel's optimal allocation of output and maximum profit contribution if it sets Q = 8(000) and P = $20.
B. Calculate the perfectly competitive industry price for Q = 8.
C. How much output would a perfectly competitive industry supply at P = $20?
D. Describe the value to society of breaking up the cartel.
3) Price/Output Determination. Cold Case, Inc., produces beverage containers used by fast food franchises. This is a perfectly competitive market. The following relation exists between the firm's beverage container output per hour and total production costs:
|
Total Output
|
Total Cost
|
|
0
|
$ 35
|
|
1,000
|
85
|
|
2,000
|
145
|
|
3,000
|
215
|
|
4,000
|
295
|
|
5,000
|
385
|
|
6,000
|
485
|
|
7,000
|
610
|
A. Construct a table showing the marginal cost of paper cup production.
B. What is the minimum price necessary for the company to supply one thousand cups?
C. How many cups would the company supply at industry prices of $75 and $100 per thousand?
4) Competitive Market Equilibrium. Syracuse Paper supplies printer paper in upstate New York. Like the output of other wholesale distributors, Syracuse Paper must meet strict guidelines and the printer paper supply industry can be regarded as perfectly competitive. Total and marginal cost relations are:
TC = $3,600 + $5Q + $0.01Q2
MC = ∂TC/∂Q = $5 + $0.02Q
where Q is cases of printer paper per day.
A. Calculate the firm's optimal output and profits if prices are stable at $20 per case.
B. Calculate optimal output and profits if prices rise to $25 per case.
C. If Syracuse Paper is typical of firms in the industry, calculate the firm's equilibrium output, price, and profit levels.