Home » Problems and Applications Q7 The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum.

# Problems and Applications Q7 The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum.

7. Problems and Applications Q7

The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum. The museum has a fixed cost of \$2,000,000 and no variable costs. There are 100,000 town residents, and each has the same demand for museum visits: Q

D

=12−P

QD=12−P, where P

P is the price of admission.

On the following graph, use green points (triangle symbol) to graph the museum’s average-total-cost curve at the following quantities: 1,000 visits, 2,000 visits, 4,000 visits, 5,000 visits, 10,000 visits, and 20,000 visits. Then use the orange line (square symbol) to graph the museum’s marginal-cost curve.

Average Total Cost

Marginal Cost

0

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2000

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0

Costs

Visits (Thousands)

What kind of market would describe the museum?

Single-price monopoly

Perfectly competitive market

Natural monopoly

The mayor proposes financing the museum with a lump-sum tax of \$20 and then opening the museum to the public for free.

Under this system, each person would visittimes. The benefit each person would get from the museum would be. (Hint: You can measure the benefit as consumer surplus minus the new tax.)

The mayor’s anti-tax opponent says the museum should finance itself by charging an admission fee.

The lowest price the museum can charge without incurring losses is. (Hint: Find the number of visits and museum profits for prices of \$1, \$2, \$3, and \$4.) At this price, each resident’s consumer surplus is.

Which of the following statements are true? Check all that apply.

Total societal welfare is better with the admission fee than under the mayor’s plan.

Revenue per person is the same regardless of whether an admission fee or the mayor’s plan is used.

Consumers are worse off with the admission fee than under the mayor’s plan.

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