a. The company's profit-maximizing price would be $6 per crossing. This would not be the efficient level of output, as the efficient level of output would be the price that would equate the marginal cost of production with the marginal benefit of production. In this case, the marginal cost of production is zero, so the efficient level of output would be the price that would equate the marginal benefit of production with zero.
b. If the company is interested in maximizing profit, it should build the bridge. The company's profit would be $2.4 million.
c. If the government were to build the bridge, it should charge a price that would equate the marginal cost of production with the marginal benefit of production. In this case, the marginal cost of production is zero, so the price should be set at zero.
d. The government should build the bridge if the benefits of the bridge outweigh the costs. This can be determined by comparing the total benefits of the bridge to the total costs of the bridge. If the total benefits exceed the total costs, then the government should build the bridge.
2. A company is considering building a bridge across a river. The bridge would cost $2 million to build and nothing to maintain. The following table shows the company¡¯s anticipated demand over the lifetime of the bridge:
Price per crossing ($) 8 7 6 5 4 3 2 1 0
Number of crossings (¡®000) 0 100 200 300 400 500 600 700 800
a. If the company were to build the bridge, what would be its profit-maximizing price? Would that be the efficient level of output? Why or why not?
b. If the company is interested in maximizing profit, should it build the bridge? What would be its profit or loss?
c. If the government were to build the bridge, what price should it charge?
d. Should the government build the bridge? Explain your answer.
1 answer
2 answers