2 . Problems and Applications Q5

Nick owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water:

Cost of first bottle:	$1
Cost of second bottle:	$3
Cost of third bottle:	$5
Cost of fourth bottle:	$7

From this information, complete the following table by deriving Nick's supply schedule.

Price	Quantity Supplied
$1 or less
$1 to $3
$3 to $5
$5 to $7
More than $7

Based on Nick's willingness to sell, plot his supply curve as a step function on the following graph using the orange points (square symbol). Be sure to plot your first point at (0, 0).

Nick's SupplyPrice = $4Quantity SoldProducer Surplus012345109876543210Price of WaterQuantity of WaterArea: 0

Suppose the price of a bottle of water is $4.

Use the black line (plus symbol) to draw a price line at $4. Next use the grey point (star symbol) to indicate how many bottles of water Nick will produce and sell at that price. Finally, use the purple point (diamond symbol) to shade the area that represents Nick's producer surplus.

In this case, Nick receives

in producer surplus from his water sales.

If the price rises to $6, Nick now sells

bottles of water. This his producer surplus to

.

Nick's Supply -+ Price = $4 Price of Water Quantity Sold Producer Surplus 0 0 2 3 4 5 Quantity of Water