Question

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.

Answer 1

According to the question, Ralph and Ed owns a monopoly in their town. So the graph is drawn in the following:


If the law allows them to install new equipment, it means The cost of producing toilet seats increases. therefore, The average cost increases. Therefore, the average cost curve continues to rise Figure. It may even move to the lowest point on the curve Is on the demand/average income curve, which means there will be no Extraordinary profits.

MC 0 MR

MC 2 MR