Sakai Bill Bur on Overpe X s//mbsdirect vitalsource.com//books 9781337516891/cfi

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Sakai Bill Bur on Overpe X s//mbsdirect vitalsource.com//books 9781337516891/cfi/3481/4/4@0.0053.2 KEMAP by Ales w Pick Parts, Build YoupowEty Foed the p e HumbleWB Gamest B -Squad and eremies Project Zombo problem above might provide reasons to favor an admission fee? Henry Potter owns the only well in town that pro- duces clean drinking water. He faces the following demand, marginal revenue, and marginal cost curves: 8. Demand: P = 70-Q Marginal Revenue: MR = 70-2Q Marginal Cost: MC = 10 + Q a. Graph these three curves. Assuming that Mr. Potter maximizes profit, what quantity does he produce? What price does he charge? Show these results on your graph. b. Mayor George Bailey, concerned about water con- sumers, is considering a price ceiling that is 10 percent below the monopoly price derived in part (a). What quantity would be demanded at this new price? Would the profit-maximizing Mr. Potter produce that amount? Explain. (Hint: Think about marginal cost.) 10. I c. George's Uncle Billy says that a price ceiling is a bad idea because price ceilings cause shortages. Is he right in this case? What size shortage would the price ceiling create? Explain. earch

Explanation / Answer

a). Solution :- The profit maximizing condition for seller / producer in economics is Marginal revenue equals to Marginal cost. (MR = MC)

Accordingly, Equating MR and MC in the given question,  

70 - 2Q = 10 + Q

70 - 10 = 2Q + Q

60 = 3Q

Q = 60 / 3

Q = 20.

P = 70 - 20 (Put the value of Q = 20 in the demand equation).

P = $ 50.

Conclusion :- Mr. Potter would produce 20 units of clean drinking water and he will charge the price of $ 50 per unit of the clean drinking water.

b). Solution :- New price (after the imposition of price ceiling) = 50 - 10 % of 50 = $ 45.

Qauntity of clean drinking water demanded at the new price of $ 45 = 70 - 45

= 25 units.

Mr. Potter would not produce the quantity of 25 units of clean drinking water because his marginal costs (MC) will be more than the marginal revenue (MR), accordingly, he will not be maximizing the profits level.

Marginal cost (At production of 25 units) = 10 + 25 = $ 35.

Marginal revenue (At production of 25 units) = 70 - 2 * 25 = $ 20.

Conclusion :- Marginal costs (MC) amounting to $ 35 is more than the Marginal revenue (MR) amounting to $ 20 at the production level of 25 units of clean drinking water, Accordingly, Mr. Potter would not produce the quantity of 25 units of clean drinking water in the above given question.

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