For a certain small town, the table shows the demand schedule for water. Assume

Question

For a certain small town, the table shows the demand schedule for water. Assume the marginal cost of supplying water is constant at $4 per bottle for a firm in all the problems. First of all, fill in the remaining columns. Suppose there are many identical firms supplying water such that each is a small fraction of the market. Calculate the quantity supplied, price charged and profits earned. Suppose now there are only two identical firms. They compete in price with each other, i.e. the firm charging a lower price gets all the customers. What will be the outcome in terms of quantity, price and profit in this case? Suppose now the two firms compete in quantity. They decide to cooperate with each other and act as if they were a monopolist. What will be the quantity supplied, price charged and profits earned by each firm?

Explanation / Answer

a)

b) It is specicfied that,there are many identical firms sulying the water, such that each is small fraction of the market, so it resembles the features of the Peferctly Competetive market, So that Qunatity demanded is equal to the Qunatitu supplied. So the Quantity supplied,Price Charged and profit schedule is below,

3) Even if there are only two identical firms, then the market structure wil remain the same as the perfect competetion and resultant data will not change

Features of perfect Competetion :

1 Many Sellers

2 Many Buyers

3. Homogenous Product

4. Zero Advertisement Cost

5. Free Entry and Exit

6. Perfect Knowledge

7. Perfect Mobility of Factors

8. No Government Intervention

9. No Transport Cost

4) In case of Monopoly, the firm wil noto perate at the loses,the firm will stop roducing the units whne they are earning losses thh firm will stop production after reaching 1200 Units , even though the price is reduced after wards they will produce only up to that level where the firm will not incur losses

Marginal Cost $4 Price Quantity
(Bottles) Total Revenue Total Cost Profit $9 200 $1,800 $800 $1,000 $8 400 $3,200 $1,600 $1,600 $7 600 $4,200 $2,400 $1,800 $6 800 $4,800 $3,200 $1,600 $5 1000 $5,000 $4,000 $1,000 $4 1200 $4,800 $4,800 $0 $3 1400 $4,200 $5,600 ($1,400) $2 1600 $3,200 $6,400 ($3,200)

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