Graphing Practice

Suppose Ralph and Ed have the only store that sells toilet bowls in northern Maine. Their nearest competitor is 211 miles away, and these two men have a reputation for producing high-quality toilet bowls. Graphically illustrate what the market for toilet bowls will look like for Ralph and Ed. Shade in the area of profit for Ralph and Ed and label the profit maximizing price (Pe) and quantity (Qe).

Then, suppose a new federal law is passed that forces all toilet bowl manufacturers to install devices that reduce the amount of water used per flush. Using a second graph, illustrate and explain what impact this new law will have on Ralph and Ed. Shade in the new area of profit for Ralph and Ed and label the profit maximizing price (P1) and quantity (Q1). Make sure to show the old profit maximizing price (Pe) and quantity (Qe) as well.

Explain how the market changed as a result of the new regulation.

Discussion Question

You and some friends are discussing news that could change the world as we know it, if the world-changing company survives! Hermes, a new automaker, unveils a new automobile that runs on plastic grocery bags and gets 100 miles to the bag. It enjoys a monopoly on this new technology. Assume that Hermes is a profit-maximizing firm and currently operates at a negative economic profit in the short run.

Draw a correctly-labeled graph for Hermes, showing the profit-maximizing price Pm and quantity Qm of the new car. Also shade the area of the negative economic profit.

Why would Hermes continue to operate in the short run if it is earning negative economic profit?

What would happen to the total revenue of Hermes if it decided to make one fewer car than Qm? Why?