Answer to Question #200105 in Macroeconomics for Abdul basit

Question

A city government is considering renting space in an all‑day parking garage for its 100 employees. The government estimates these employees' demand function for parking spaces is 150 ‑ 50P (P ≥ $1), where P is the per-day price of parking, and the city will pass on the cost.

 

 (a)     If the city needs not charge each of its employees the same price for a parking space, what is the maximum amount the city could pay for the 100 spaces, and what would be the average cost per space?

 

 (b)    Assume the employees’ union insists that – per their contract – each employee must be charged the same price for parking, and the city’s response is to intend charging the price that maximizes its parking fee revenue. What price per space would the city charge under this circumstance, and how much less total dollar benefit would the employees receive?

Answer 1

Solution:

a.). Demand function for parking: Q = 150 – 50P

100 = 150 – 50P

50P = 150 – 100

50P = 50

P = 1

The maximum amount the city could pay for the 100 spaces = (1 x 2) x 100 = 2 x 100 = $200

Average cost per space = 200/100 = $2

 

b.). Set MR = MC

150 = 100P

P = 1.5

The city will charge a price per space = $1.5

Less dollar benefit employees will receive = $6.25