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price output decisions for perfect competition and monopoly

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Sun City, Arizona, a retirement community that features full-service living arrangements, is considering two proposals to provide lawn care to elderly residents. First, a national lawn care firm has offered to purchase the city's lawn care equipment at an attractive price in return for an exclusive franchise on residential service. The second proposal would allow several small companies to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given neighborhood. The city would then allocate the business to the lowest bidder.

The city has conducted a survey of Sun City residents to estimate the amount they would be willing to pay for various amounts of lawn care service. The city has also estimated the total cost of service per resident. Service costs are expected to be the same whether or not an exclusive franchise is granted.

A) Use the indicated price and total cost data to complete the following table

Hours of Price per Total Marginal Total Marginal
Care per Hour Revenue Revenue Cost Cost
Month

0 $22.50 $0.00
1 21.75 21.00
2 21.00 40.50
3 20.25 58.50
4 19.50 75.75
5 18.75 92.25
6 18.00 107.25
7 17.25 120.75
8 16.50 132.00
9 15.75 150.00
10 15.00 180.00

B) Determine price and level of service if competitive bidding results in a perfectly competitive price/output combination
C) Determine price and the level of service if the city grants a monopoly franchise

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Sun City, Arizona, a retirement community that features full-service living arrangements, is considering two proposals to provide lawn care to elderly residents. First, a national lawn care firm has offered to purchase the city's lawn care equipment at an attractive price in return for an exclusive franchise on residential service. The second proposal would allow several small companies to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given ...

Solution Summary

This post illustrates how to work out the price/output decisions for a firm operating in perfect competition and that for a firm operating as a monopoly.

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See Also This Related BrainMass Solution

Pricing and output decisions - Monopoly and Perfect competition

Your consulting firm was just granted an exclusive contract for your state. You now must decide your pricing policy, given the following relationships:

P = $1400 - 0.0004Q

MR = $1400 - 0.0008Q

AVC = $1000

where P is the price, Q the quantity, and AVC the average variable cost.

The firm will encounter no fixed costs, and all revenue is after taxes. As your firm has been granted an exclusive contract, your pricing and output decisions will be those of a monopolist.

Tasks:

Using the data above, calculate the output the firm will provide.
Determine the price at this output level.
Complete the Microsoft Excel Template given below using the data in the problem.
Check whether your data is consistent with your calculations in question 1. Why or why not?
Now assume that the state decides to give as many contracts as it can for the same activity, so your firm is now operating in a perfectly competitive market. How will your price and output decisions change? Explain the differences and why these changes happened.

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