Practice set 6

# Practice set 6 - service Conditions change very slowly in...

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Practice set 6 1) Homer's boat manufacturing has a monopoly on boat sales in the region. Homer's marginal cost of the 8th boat produced is \$1,200. He produces only eight boats and can sell all eight boats for \$1,500. The elasticity of demand at this price is -2. Is Homer maximizing profits? 2) John Gardner is the city planner in a medium-sized southeastern city. The city is considering a proposal to award an exclusive contract to Clear Vision, Inc., a cable television carrier. Mr. Gardner has discovered that an economic planner hired a year before has generated the demand, marginal revenue, total cost and marginal cost functions given below: P = 28 - 0.0008Q MR = 28 - 0.0016Q TC = 120,000 + 0.00062 MC = 0.0012Q, where Q = the number of cable subscribers and P = the price of basic monthly cable

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Unformatted text preview: service. Conditions change very slowly in the community so that Mr. Gardner considers the cost and demand functions to be reasonably valid for present conditions. Mr. Gardner knows relatively little economics and has hired you to answer the questions listed below. a. What price and quantity would be expected if the firm is allowed to operate completely unregulated? b. Mr. Gardner has asked you to recommend a price and quantity that would be socially efficient. Recommend a price and quantity to Mr. Gardner using economic theory to justify your answer. c. Compare the economic efficiency implications of (a) and (b) above. Your answer need not include numerical calculations, but should include relevant diagrams to demonstrate deadweight loss. Solution Problem 1) Problem 2:...
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## This note was uploaded on 03/21/2010 for the course ECO 303 taught by Professor Yunshanchan during the Fall '08 term at SUNY Stony Brook.

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Practice set 6 - service Conditions change very slowly in...

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