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 ceiling10percent below the monopoly price derived inpart (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 ceiling50percent 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?