Answered: Henry Potter owns the only wcU in town…

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter15: Monopoly

Section: Chapter Questions

Problem 8PA

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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?

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