A municipal water utility employs quasi-fixed capital inputs-the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves.The figure below shows the cost structure of this utility for various levels of water service.Quantity of water consumption is measured in 1,000-gallon units per month.AQFC is the average quasi-fixed cost curve,and LAC is long-run average cost.Long-run marginal cost,LMC,is constant and equal to $4 per 1,000-gallon unit.The inverse demand equation is . Quasi-fixed capital inputs cost per month is $____.

Question

A municipal water utility employs quasi-fixed capital inputs-the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves.The figure below shows the cost structure of this utility for various levels of water service.Quantity of water consumption is measured in 1,000-gallon units per month.AQFC is the average quasi-fixed cost curve,and LAC is long-run average cost.Long-run marginal cost,LMC,is constant and equal to $4 per 1,000-gallon unit.The inverse demand equation is  .  Quasi-fixed capital inputs cost per month is $____.

Quizplus · Accepted Answer

To find the quasi-fixed capital inputs cost per month, we need to look at the minimum of the AQFC curve. From the graph, we can see that the minimum of the AQFC curve occurs at a quantity of approximately 40,000 units per month. At this level of output, the AQFC curve intersects the LAC curve. From the LAC curve, we can see that the long-run average cost at this level of output is approximately $6.25 per 1,000-gallon unit. Therefore, the total quasi-fixed capital inputs cost per month is:

40,000 units/month x $6.25/1,000-gallon unit = $250,000/month

Thus, the correct answer is C) 250,000.

A Municipal Water Utility Employs Quasi-Fixed Capital Inputs-The Water Treatment