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Homework answers / question archive / The town of Smallsville is considering building a museum
The town of Smallsville is considering building a museum. The interest on the money Smallsville will have to borrow to build the museum will be $1,000 per year. Each citizen's marginal benefit from the museum is shown in the following table, and this marginal benefit schedule is public information. Citizen Anita Brandon Carlena Dallas Eloise Marginal benefit from museum ($/year) 340 290 240 190 140 a. Assuming each citizen voted his or her private interests, would a referendum to build the museum and raise each citizen's annual taxes by $200 pass? Yes the referendum would pass. b. A citizen proposes that the city let a private company build the museum and charge the citizens a lump-sum fee each year to view it as much as they like. Only citizens who paid the fee would be allowed to view the museum. If the private company were allowed to set a single fee, would any company offer to build the museum? (Hint: Consider the revenue a single-price monopolist could earn relative to the annual interest payment of $1,000.) No a private company would not be willing to build and operate the museum. C. A second citizen proposes allowing the private company to charge different prices to different citizens and auctioning the right to build the museum to the highest bidding company. Again, only the citizens who pay the fee may view the museum. What is the highest bid a private company would make to supply the museum to Smallsville? (Hint: Consider the revenue a perfectly price discriminating monopolist could earn relative to the annual interest payment of $1,000.) The highest bid would be $ 1200 per year.
Step 1 :-
From the below Table, we can assume wether the referendum would pass / not;
| Citizen | Marginal benefit | Net benefit | Single price monopolist | price discriminant monopolist |
| anita | 340 | 140 | 340 | 340 |
| brandon | 290 | 90 | 580 | 630 |
| carlena | 240 | 40 | 720 | 870 |
| dallas | 190 | -10 | 760 | 1060 |
| Eloise | 140 | -60 | 700 | 1200 |
Net Benefit = Marginal Benefit - 200
Step 2 :-
A)
Given citizen’s annual Tax = $200
Therefore After deduction of the taxes, Anitha, Brandon and Carlena have positive benefits, Hence they will Vote in favour of museum.
They the Referendum Would Pass.
B)
From the above table we can notice that , single monopolist price(760) is maximum at 190.
Given total cost is $1000 and the Maximum revenue we got is $760
Therefore Private company is Not willing to build and operate the Museum.
C)
The highest revenue Generated by the Price discriminant monopolist is $1200 per Year. The Total costs Incurred is $1000, Therefore the highest BID that a private company would make is ( $1200 – $1000 ) $200.
Hence, the Highest BID for the License is $200.
