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Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water: Cost of first bottle $1 Cost of second bottle $3 Cost of third bottle $5 Cost of fourth bottle $7 a. From this information, derive Ernie’s supply schedule. Graph his supply curve for bottled water. b. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get from these sales? Show Ernie’s producer surplus in your graph. c. If the price rises to $6, how does quantity supplied change? How does Ernie’s producer surplus change? Show these changes in your graph.

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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Chapter
Section
BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 7, Problem 5PA
Textbook Problem
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Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water:

Cost of first bottle    $1

Cost of second bottle    $3

Cost of third bottle    $5

Cost of fourth bottle    $7

a. From this information, derive Ernie’s supply schedule. Graph his supply curve for bottled water.

b. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get from these sales? Show Ernie’s producer surplus in your graph.

c. If the price rises to $6, how does quantity supplied change? How does Ernie’s producer surplus change? Show these changes in your graph.

Subpart (a):

To determine
The supply schedule of the water bottles.

Explanation of Solution

We have given the cost associated with pumping the bottled water and it can be tabulated as follows:

PriceQuantity supplied
More than $74
$5 to $73
$3 to $52

Subpart (b):

To determine
The supply schedule of the water bottles and producer surplus.

Subpart (c):

To determine
The supply schedule of the water bottles and producer surplus.

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