Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 15 - Part V - Monopoly - Problems and Applications - Page 325: 6

Answer

a) Please see the graph. The museum is a natural monopoly (due to the high fixed costs). b) People would visit five times, and each person would have surplus of 26 dollars. c) The lowest price is 4 dollars. d) Consumer surplus is 12 dollars. Consumers are better off with the flat tax, and the museum is made better off with the admission fee. e) One consideration is that not everyone has the same preferences. Some people may not want to go to a museum, so their preferences are disregarded (in the town of Ectenia).

Work Step by Step

a) The graph shows the average total cost curve and the marginal cost curve. b) revenue = price * quantity Since the demand equation is $Q^{D}=10-P$, we can say $R = P*Q$ $R = P*(10-P)$ $R=10P-P^2$ $MR =10-2P$. Consumers will visit until the marginal revenue is zero. $0=10-2P$ $2P=10$ $2P/2 = 10/2$ $P=5$ (five visits) $Q^{D}=10-P$ $Q^{D}=10-5$ $Q^{D}=5$ Consumer surplus = $10*10*1/2 - 24$ $50-24$ $26$ c) Please see the table that shows the total revenue. d) At a price of 4 dollars, each person will visit six times. Consumer surplus = $4*6*1/2$ $CS = 4*3$ $CS =12$
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