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Consider the market for residential water as being monopolized by the city. (Assume the marginal cost...

Consider the market for residential water as being monopolized by the city. (Assume the marginal cost curve slopes upward.) In the initial equilibrium, they are earning a little profit.
13.3.  

Short run market impact

What will the replacement of the main waterline do to consumer and producer surplus in this market?
A.  CS falls; PS rises
B.  CS same; PS rises
C.  CS same; PS falls
D.  CS falls; PS same
E.  CS rises; PS rises
F.  CS same; PS same
G.  CS falls; PS falls
H.  CS rises; PS same
I.  CS rises; PS falls
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Answer #1

Answer: A

Equilibrium in monopoly structure is at a point where (MC = MR). Since profit was low at the earlier equilibrium, it will be increased once the replacement took place. This thing increases price, since MC increases. Higher profit of firm indicates higher producer surplus (PS), but it reduces consumer surplus (CS) because of paying more.

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