Ques 1
The government is planning to build a bridge which connnects the North and South of the country. The cost of building the bridge is $2,000,000. The marginal cost of building the bridge is zero. The government must decide if it will build the bridge or contract the sole construction company in the country to build the bridge. If the company builds the
bridge, it will recover its costs and possibly earn a profit from charging residents to use
the bridge. The demand schedule is shown in the table below:
Price Quantity
$8 0
7 100
6 200
5 300
4 400
3 500
2 600
1 700
0 800
(a) Determine (i) the profit maximising price and quantity and (ii) socially efficient
price and quantity.
(b) If the company is offered the contract, should it build the bridge? Why or why
not?
(c) If the government were to build the bridge, what economic rule should it adopt in
order to be efficient? What price should it charge residents?
(d) Should the government build the bridge? Why or why not?
Ques.2. The following presents the costs and revenues for a firm.
Quantity
Total Cost
Total Revenue
0
$ 8
$ 0
1
9
8
2
10
16
3
11
24
4
13
32
5
20
40
6
28
48
7
38
56
(a) Calculate the marginal cost, marginal revenue and profit for each level of
production.
(b) How many units should the firm produce to maximize profit?
(c) Plot the marginal revenue and marginal cost curves.
(d) Is the industry the firm operates in competitive? Is the industry in long-run
equilibrium?