Textbook Problem

Henry Potter owns the only well in town that produces dean drinking water. He faces the following demand, marginal revenue, and marginal cost curves:

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 consumers, 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.)

c. Georg’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.

d. George's friend Clarence, who is wen more concerned about consumers, suggests a price ceiling 50 percent below the monopoly price. What quantify 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?