Answered: Henry Potter owns the only wcU in town…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

Henry Potter owns the only wcU in town that pro-duces
clean drinking water. He faces the follO\\•ing
demand, marginal revenue, and marginal cost curves:
Demand: P • 70 - Q
Marginal Revenue: MR • 70 - 2Q
~arginal Cost: MC • lO + Q
a. Graph these three curves. Assuming that
Mr. Potter maximizes profit, what quantity docs
he produce? What prioc does he charge? Show
these rcsuiiS on your graph.
b. Mayor George Bailey, concerned about water con~
sumcrs_. 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. (Hi11t:
1hink about marginal cost.)
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 prioc ociling create? Explain.
d. George's friend Clarence, who is even more con~
cerncd about consumers, suggests a price ceiling
50 percent below the monopoly price. What quantity
would be demanded at this price? How much
would Mr. Potter produce? In this case, is Uncle
Billy right? What size shortage would the price
ceiling create?

Expert Solution