Answer to Question #275362 in Microeconomics for khashayar

Question

3. The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum. The museum has a fixed cost of $2,400,000 and no variable costs. There are 100,000 town residents, and each has the same demand for museum visits: 𝑄𝐷=10−𝑃 where P is the price of admission.

d) For the break-even price you found in part (c), calculate each resident’s consumer surplus. Compared with the mayor’s plan, who is better off with this admission fee, and who is worse off? Explain.

e) What real-world considerations absent in the problem above might provide reasons to favor an admission fee?

Answer 1

Solution:

d.). Fixed cost, FC=$2,400,000

Number of residents, N=100,000

Average Fixed Cost, AFC= FCN=$2,400,000/100,000=$24

FCN=$2,400,000100,000=$24

Since there is no variable cost,

Marginal Cost, MC=0

Since it is a monopoly market, the price equals the average cost, which is $24, then the consumer surplus is,

=$24×10=$240

The benefit each person would get

Consumersurplus−tax=$240−$24=$216=Consumersurplus−tax=$240−$24=$216

Thus, each person gets a benefit of $216.

The consumers are better off.