Case situation:
Sun City, Arizona, a retirement community that features full-service living arrangements, is considering two proposals to provide lawn care to elderly residents. First, a national lawn care firm has offered to purchase the city’s lawn care equipment at an attractive price in return for an exclusive franchise on residential service. The second proposal would allow several small companies to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given neighborhood. The city would then allocate the business to the lowest bidder.
The city has conducted a survey of Sun City residents to estimate the amount they would be willing to pay for various amounts of lawn care service. The city has also estimated the total cost of service per resident. Service costs are expected to be the same whether or not an exclusive franchise is granted.
Question 1: Use the indicated price and total cost data to complete the following table
Hours of Price per Total Marginal Total Marginal
Care per Hour Revenue Revenue Cost Cost
Month
0 $22.50 $0.00
1 21.75 21.00
2 21.00 40.50
3 20.25 58.50
4 19.50 75.75
5 18.75 92.25
6 18.00 107.25
7 17.25 120.75
8 16.50 132.00
9 15.75 150.00
10 15.00 180.00
Question 2: Determine price and level of service if competitive bidding results in a perfectly competitive price/output combination.
Question 3: Determine price and the level of service if the city grants a monopoly franchise.