Question

. A town has a monopoly supplier of potable water. The monopolist faces the following demand,...

. A town has a monopoly supplier of potable water. The monopolist faces the following demand, marginal revenue, and marginal cost curves:

Demand: P = 70 – Q

Marginal Revenue: MR = 70 – 2Q

Marginal Cost: MC = 10 + Q

Graph these curves.

Assuming that the firm maximizes profit, what quantity does it produce? What price does it charge? Show these results on your graph.

The local government decides to impose a price ceiling that is 10 percent below the monopoly price derived in part (ii). What quantity would be demanded at this new price? Would the profit maximizing monopolist produce that amount?

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