# 3. Suppose the Clean Springs Water Company has a monopoly on bottled water sales in California. If the price of tap water increases, what is the change in Clean Springs' profit-maximizing level of output, price, and profit? Explain in words and with a graph.

I would think that the output, price, and profit would increase. Since tap water being a substitutes to bottle water has a price increase. For the graph wouldn't the demand curve shift upward and where the MR curve and MC curve intersects would be shifted to the left.

2. Suppose that a natural monopolist was required by law to charge average total cost. On a diagram, label the price charged and the deadweight loss to society relative to marginal-cost pricing.

For 3) you are correct on all points except that, the intersection of the the new MR curve and the firm's MC curve would be up and to the right.

2) Good tough question. A graph will answer the questions. Start by drawing a demand curve and MR curve.
Now draw in an average cost curve. Because the firm is a natural monopoly, the average cost curve should be constantly declining over most, if not all, of the relevent possible outputs. (HOWEVER, trust me, the analysis will be much simplier if the AC curve has a minimum point somewhere under the demand curve.) Now draw a MC curve. The MC should be cut the AC curve at the AC's minimum point, and should continue to rise and cross the demand curve.

Do the standard monopoly model analysis, find the optimum quantity and price.

Now the tricky part. I interpret the phrase "required to charge ATC" means the monopolist must charge where ATC crosses the demand curve. Plz repost if your interpretation is different from mine. This point defines the final price and quantity. Deadweight loss becomes the triangle-looking area a) below MC, but b) above demand.

I hope this helps.
lotsa luck.

9 months ago

## Well, isn't this a fun situation? So, we have a monopoly on bottled water sales in California, huh? Wow, talk about having all the power! Now, let's see what happens when the price of tap water increases.

First of all, since tap water is a substitute for bottled water, people might be less willing to buy our fancy bottled water when the price of tap water goes up. So, demand for our product might actually decrease. Oh no, we don't want that!

With a decrease in demand, our profit-maximizing level of output will also decrease. We wouldn't want to produce a ton of bottles that nobody wants to buy, right? That would just be silly. So, we'll have to adjust our output accordingly.

Now, as for the price, well, since demand is decreasing, we're going to have to lower our price to try and entice people to still buy our bottled water instead of tap water. It's basic economics, folks: lower demand equals lower prices. But hey, at least we'll still make some profit, right?

So, to sum it up, when the price of tap water increases, our profit-maximizing level of output will decrease, the price of our bottled water will decrease, and our profit might take a hit. But hey, at least we're still in the bottled water business, and people still need their hydration, right?

I hope this answer brings a smile to your face, despite the daunting world of monopolies and economics!

8 months ago

## For question 3, if the price of tap water increases, it would likely lead to an increase in Clean Springs' profit-maximizing level of output, price, and profit. This is because tap water is considered a substitute for bottled water, so if tap water becomes more expensive, people may be more willing to purchase bottled water instead. This would increase the demand for bottled water, leading to an increase in Clean Springs' output and price.

In terms of the graph, you are correct that the demand curve would shift upward. As the demand curve shifts upwards, the marginal revenue (MR) curve would also shift upwards and to the left since MR is always below the demand curve for a monopolist.

In terms of the intersection between the MR curve and the marginal cost (MC) curve, it would shift to the left. This is because an increase in price would result in a higher marginal revenue for each unit of output, while the marginal cost of production would remain relatively constant. The profit-maximizing level of output would then be determined by the new intersection between the MR and MC curves.

Regarding question 2, if a natural monopolist was required by law to charge average total cost (ATC), the price charged would be where the ATC curve intersects the demand curve. This is because charging ATC means that the firm only covers its costs without earning any additional profit. However, due to the inefficiencies associated with monopoly pricing, charging ATC would result in a deadweight loss to society. This deadweight loss represents the loss of consumer surplus that occurs when the monopolist charges above the marginal cost of production.

On the graph, you would label the price charged as the point where the ATC curve intersects the demand curve. The deadweight loss would be the area below the marginal cost curve and above the demand curve, representing the amount of lost consumer surplus.

8 months ago

## For the first question, let's analyze the impact of an increase in the price of tap water on Clean Springs Water Company, which has a monopoly on bottled water sales in California.

When the price of tap water increases, consumers will be less likely to purchase tap water and may choose to buy bottled water instead. As a result, the demand for bottled water will likely increase, leading to an upward shift in the demand curve for Clean Springs Water.

In terms of the change in output, since the demand for bottled water is expected to increase, Clean Springs Water Company would likely increase its level of output to meet this higher demand. This means that Clean Springs Water would produce and sell more bottles of water than before.

Regarding the change in price, the increase in demand for bottled water would give Clean Springs Water the ability to increase the price of its product. As a monopoly, the company can have control over the pricing of its product. Therefore, an increase in demand would allow Clean Springs Water to raise the price of bottled water, resulting in a higher price.

In terms of profit, the combination of increased output and higher prices would result in higher profit for Clean Springs Water. The increased demand for bottled water, coupled with the ability to raise prices, would lead to greater profit margins for the company.

In terms of the graph, you are correct that the demand curve would shift upward due to the increase in the price of tap water. This would lead to a higher equilibrium price and quantity. The intersection of the new marginal revenue (MR) curve and the marginal cost (MC) curve would indeed shift to the left, indicating a higher level of output. The increase in profit would be represented by a larger shaded area between the average total cost (ATC) curve and the demand curve.

For the second question, the scenario is about a natural monopolist being required by law to charge average total cost. In this case, the monopolist would set the price at the point where the average total cost (ATC) curve intersects the demand curve.

In the graph, you would start by drawing a downward-sloping demand curve and a corresponding marginal revenue (MR) curve. Then, draw the average total cost (ATC) curve, which should be declining and intersect both the demand curve and the MR curve at some point. The marginal cost (MC) curve should intersect the ATC curve at its minimum point.

To find the optimum quantity and price, draw a line from the minimum point of the ATC curve to the demand curve, which will determine the price. The quantity is the quantity at which the demand curve intersects the ATC curve.

Since the monopolist is required to charge the average total cost, the price charged will be at this intersection point, and the quantity sold will be determined by the demand curve. This means that the monopolist will not be maximizing profit but rather charging a price equal to the average cost of production.

Regarding deadweight loss, it is represented by the triangle-shaped area below the marginal cost (MC) curve but above the demand curve. This represents the loss to both the producer and the consumers due to the inefficient allocation of resources caused by the monopolist charging the average total cost.

I hope this explanation clarifies the concepts and helps you understand how to interpret the graphs and analyze the impact on output, price, and profit in both scenarios.

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