Washtenaw County is looking to repave a large number of roads and so puts out a Request for Proposal looking for contractors to do the work. Specifically, the city is looking to repave 700 miles of road, but is willing to hire multiple contractors to do the work. (I.e., one contractor doesn't have to be willing/able to repave all 700 miles in order to win some of the work.) In the Request for Proposal the county states that they will pay all contractors a standard rate of $120,000 per mile paved. (You can assume that they would get paid for partial miles as well. I.e., it's okay for a bid to not be an integer.)
Peter and Lois run a paving company and are thinking of bidding to win some of this work. Their company's marginal cost for paving a road is given by MC(q)=100,000+400q, where q is the number of miles of road paved. (This means that the marginal cost at q=1 is $100,400. The marginal cost at q=2 is $100,800. Etc.)
A) The profit maximisation condition is MC=MR. Here the marginal cost (MC) for 700 miles = 100,400 * 700 = 70280000 and the marginal revenue (MR) for 700 miles = TR/Q=84000000/700 = 120000 so the company never choose 700 miles. Because the marginal cost is more than that of marginal revenue. The company choose only two miles of road because when they agree to supply two miles then the marginal revenue is 240000/2 = 120000. And the marginal cost is 100800. The marginal revenue is fixed as 120000 for all outputs. After the two miles , additional miles increases the marginal cost of the firm. So they choose to only two miles of roads.
B) The firm afford only 19200 as fixed cost. Because the difference between MC and MR while supply two miles is 19200. After that level of fixed cost increases the cost of the firm.
Get Answers For Free
Most questions answered within 1 hours.