Part II
21. 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.
22. Monopoly Equilibrium. The Athletic Medicine Center in Madison, Wisconsin, enjoys pricing power in the practice of medicine. Market demand and marginal revenue relations for a standard medical procedure to repair damaged knee cartilage are:
P = $5,000 – $0.05Q
MR = TR/Q = $5,000 – $0.1Q
Fixed costs are nil, and average variable costs are constant at $4,000 per unit.
A. Calculate the profit-maximizing price/output combination and economic profits if the Athletic Medicine Center enjoys an effective monopoly.
B. Calculate the price/output combination and total economic profits that would result if new entrants create a perfectly competitive market.
23. Optimal Price. Woofer-Tweeter, Inc., recently offered instant rebates of $25 off the regular $1,000 price on Soundman CD players. Sales responded, rising 6.25% over the previous month’s level.
A. Calculate the point price elasticity of demand for Soundman CD players.
B. If the marginal cost per unit is $600, was the original $1,000 price optimal?
*the work is attached on a word document* Assignment should be done on an excel document using excel functions*
