Every house in a small town has a well that provides water at no cost. However, if the town wants more than 10,000 gallons a day, it has to buy the extra water from firms located outside of the town. The town currently consumes 9,000 gallons per day.
a. Draw the linear demand curve.
b. The firms’ supply curve is linear and starts at the origin. Draw the market supply curve, which includes the supply from the town’s wells.
c. Show the equilibrium. What is the equilibrium quantity? What is the equilibrium price? Explain.