Question

2. There is one public golf course on the island of Augusta. The golf course's demand and cost curves are shown in the graph below. Only residents of the island are allowed to play on this golf course. The golf course charges a greens fee to play a round of golf. The island's council is debating how much the greens fee should be. PRICE COST Marginal Cost Average Total Cost Demand Q, O, O, QXQs 0 Q, ATTENDANCE Marginal Revenue a. Using the labeling of the graph above, identify: i. The price and quantity where the golf course maximizes profit. Explain. ii. The price and quantity where the golf course maximizes total revenue. Explain iii. The price and quantity where the golf course is allocatively efficient Explain iv. The price and quantity where the golf course earns a normal profit. Explain

Answer 1

2.

a.

i. As there is only one golf course in Augusta island. So it is a type of monopoly and a Monopolist firm maximizes profit where marginal revenue is equals to the marginal cost.

In the graph above, MR=MC at Quantity= Q2 and at this quantity through demand curve the Price= P5.

ii.

Total revenue maximizes where the value of marginal revenue is zero that is when MR curve intersect the X-axis.

In the graph above, MR curve intersect with X-axis at quantity= Q4 where through demand curve the price = P3.

iii.

Allocative efficiency means that goods and services are optimally distributed to the consumers. This point arises where Demand curve intersect the MC curve.

In the curve above, Demand curve and MC intersect when Quantity= Q3 and price= P4.

iv.

Normal profit is a situation when profit earn by the firm is equals to zero.

Profit= 0

(AR-ATC) Q=0

AR= ATC

Normal profit arises where demand curve and average total cost curve intersect.

In the above graph, normal profit arises when quantity= Q5 and price = P2.