1.

Henry Potter owns the only well in town that produces clean 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.

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 price ceiling create? Explain.

d.

George's friend Clarence, who is even more concerned 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?