Problem 1. Explain what, if any, each of the following government actions will have on the output of a profit maximizing monopolist, assuming that none of the actions is so severe as to make the monopolist shut down. Use a graphical model to demonstrate each of the following effects.
a. A licence fee to be paid for the privilege of operating and which does not depend on the level of output.
b. A proportional tax on profits, say 50%.
c. A tax on every unit of output produced that is equal to some constant number of dollars.
Problem 2. Suppose a condominium community consists of five residents: A, B, C, D, and E. They are interested in purchasing the services of a security company which will supply security guards at a cost of $200 per week each. The provision of security is a pure public good - when a security guard is hired by any one individual, security is provided to the entire community. The following table illustrates the value of security to each resident of the community (where the marginal benefits are expressed in terms of willingness to pay). Thus, for example, resident A would be willing to pay $100 for the first guard, an additional $80 to have another guard, and so on.
Marginal Benefits of Security Guards:
|
Resident
|
1 Guard
|
2 Guards
|
3 Guards
|
4 Guards
|
|
A
B
C
D
E
|
$100
80
50
40
30
|
$ 90
70
40
30
20
|
$ 80
60
30
20
10
|
$70
50
20
10
0
|
a) From the community’s point of view, what is the optimal number of guards to hire?
b) If the hiring of security guards is left up to individual residents, how many would be hired?