1. A firm is considering building a bridge. The cost to build the bridge is $2 million with no maintenance costs. The following table shows demand for the entire life time of the bridge:
Price per crossing # of crossings
$8 0
7 100,000
6 200,000
5 300,000
4 400,000
3 500,000
2 600,000
1 700,000
0 800,000
a. What is the profit maximizing price? 4
b. What is the efficient level of output? why? 80,000
c. If the firm is interested in maximizing profit, shout it build the bridge? No, the cost shouldn't be more than 1,600,000
d. If the government was to build the bridge, what price should the government charge? NOT SURE ON THIS
e. Should the government build the bridge? Why? If cost is below 8.4 million, government should build the bridgeEconomics School Problem: need some advice?
I agree with the answers you put for (a) and (c). The rest should be as follows:
(b) Where did 80,000 come from??? Does ';output'; mean ';number of bridge crossings';?? Then you probably mean 800,000. It is efficient since the marginal cost of bridge crossings in this example is zero.
(d) The government ';should'; charge an efficient price. That is, a price where price equals marginal cost, which is zero. So, the government will not charge for bridge crossings and the level of output in this case will be efficient (see part (b)).
(e) Where did $8.4 million come from in your answer? The government ';should'; build the bridge if the total social value of doing so is positive. Given that they will not charge for bridge use, the number of crossings will be 800,000. Given the demand schedule, the total consumer surplus from the bridge is: 8*800,000/2 = $3,200,000. So, the government should build the bridge because the consumer surplus is greater than the construction cost of $2 million. But, they shouldn't build the bridge if the cost is above $3.2 million (*not* 8.4).
Hope that helps.
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