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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The residents of the town Ectenia all low 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.

a. Graph the museum’s average-total-cost curve and its marginal-cost curve. What kind of market would describe the museum?

b. The mayor proposes financing the museum with a lump-sum tax of $24 and then opening the museum to the public for free. How many times would each person visit? Calculate the benefit each person would got from the museum, measured as consumer surplus minus the new tax.

c. The mayor’s anti-tax opponent says the museum should finance itself by charging an admission fee. What is the lowest price the museum can charge without incurring losses? (Hint: Find the number of visits and museum profits for prices of $2, $3, $4, and $5.)

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?

Subpart (a):

To determine
The consumer surplus and effect of tax.

Explanation

Figure 1 illustrates the average total cost curve.

Figure 1 depicts the museum’s average total cost curve and marginal cost curve...

Subpart (b):

To determine
Calculate the consumer surplus.

Subpart (c):

To determine
Calculate profit.

Subpart (d):

To determine
The consumer surplus.

Subpart (e):

To determine
Favors of admission fee.

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