Table 17-36
The information in the table shows the total demand for water service in Takoma. Assume that there are two companies operating in Takoma. Each company that provides these services incurs an annual fixed cost of $400 and that the marginal cost of providing the service to each customer is exactly $2.00. Figures listed are for an annual service contract.

-Refer to Table 17-36. If there were only one water service provide in this market, and this single firm maximizes profits, the company will
A)sell 500 service contracts and charge a price of $35 for each contract.
B)sell 600 service contracts and charge a price of $30 for each contract.
C)sell 700 service contracts and charge a price of $25 for each contract.
D)sell 800 service contracts and charge a price of $20 for each contract.

Question

​Table 17-36
The information in the table shows the total demand for water service in Takoma. Assume that there are two companies operating in Takoma. Each company that provides these services incurs an annual fixed cost of $400 and that the marginal cost of providing the service to each customer is exactly $2.00. Figures listed are for an annual service contract.
​ 
-​Refer to Table 17-36. If there were only one water service provide in this market, and this single firm maximizes profits, the company will
A)​sell 500 service contracts and charge a price of $35 for each contract. 
B)​sell 600 service contracts and charge a price of $30 for each contract. 
C)​sell 700 service contracts and charge a price of $25 for each contract. 
D)​sell 800 service contracts and charge a price of $20 for each contract.

Quizplus · Accepted Answer

A monopolist will set output where marginal revenue (MR) equals marginal cost (MC). In this case, MC is constant at $2.00 per contract. The monopolist's total cost function can be expressed as TC = $400 + $2Q where Q is the number of contracts sold. The monopolist's marginal cost function is MC = $2.00. The monopolist's total revenue function can be expressed as TR = P × Q, where P is the price per contract and Q is the number of contracts sold. The monopolist's marginal revenue function is MR = ∆TR/∆Q = P + (∆Q/∆Q) × Q = P. Therefore, MR = P. The profit-maximizing output level occurs where MR = MC. We can set MR = MC to obtain P = $2.00, adding this to the equation for total cost yields $400 + $2Q = $2Q + $2.00Q, or Q = 600. Therefore, the monopolist will sell 600 service contracts and charge a price of $30 for each contract.

​Table 17-36 the Information in the Table Shows the Total Demand for Demand

Table 17-36 the Information in the Table Shows the Total Demand for Demand