question archive Suppose that the AC and MC per bottle of vending machine soda pop is $1
Suppose that the AC and MC per bottle of vending machine soda pop is $1
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Suppose that the AC and MC per bottle of vending machine soda pop is $1.25. At this price, suppose that campus vending machines would sell 1 million cans annually. Assume that the University allows only a single firm to supply vending machine soda pop, and this firm charges p = $1.50. At this price, 900,000 cans are sold annually.
(a) If the University sold the rights to be the vending machine monopolist, how much would it collect annually?
(b) Will students (and other soda pop buyers) favor competitively priced soda pop or the monopoly? Calculate their loss.
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A: $225,000
The university would collect the profits of the monopolist since competitive bidding would cause the price of the rights to equal profits. The profit of the vending machine company is ($1.5-$1.25)*900,000=$225,000.
B: They will favor the competitively priced soda pop
Students will favor the competitively priced soda pop because it will allow them to purchase more soda at a lower price. The loss is the area of deadweight loss and producer surplus that used to be consumer surplus. This is $0.25*100,000*0.5+$0.25*900,000= $237,500
