In the 1928, Knoxville was served by a single railroad line. Because alternative forms of transportation were not close substitutes for rail transportation in 1928, this railroad had a transportation monopoly in Knoxville. The estimated monthly fixed cost associated with operating a railroad was $1,200. In addition, there was a constant average variable cost and marginal cost of $0.02 per ton-mile associated with the railroad's operation. The estimated monthly demand for transportation on the railroad was: Qd = q = 80,000 - 1,000,000P where Qd was the monthly quantity demanded in ton-miles and P was the price per ton-mile in dollars. Based upon the above equation, answer the following questions: a. What is the profit-maximizing price and quantity? b. Would a private company build the railroad? c. What is the socially optimal price and quantity?
In the 1928, Knoxville was served by a single railroad line. Because alternative forms of transportation were not close substitutes for rail transportation in 1928, this railroad had a transportation
Qd = q = 80,000 - 1,000,000P
where Qd was the monthly quantity demanded in ton-miles and P was the
a. What is the profit-maximizing price and quantity?
b. Would a private company build the railroad?
c. What is the socially optimal price and quantity?
Step by step
Solved in 3 steps with 6 images
