Every House in a small town has a well that provides water at no cost. However,

Question

Every House in a small town has a well that provides water at no cost. However, if the town wants more than 10,000 gallons a day, it has to buy extra water from firms located outside of the town. The town currently consumes 9,000 gallons per day.

a. Draw a linear demand curve

b. The firm's supply curve is linear and starts at the origin. Draw the market supply curve, which includes the supply from the town's well.

c. Show the equilibrium. What is the equilibrium quantity? What is the equilibrium price? Explain

Explanation / Answer

Market Supply follows horizontal axis up to Q=10,000, then goes up linearly. It is a sum of 10,000 free gallons, plus whatever firms provide given price P. Intersection is Q=9000, P=0. City's water needs are covered by wells, and none is bought from firms.

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