Acme Water is a privately owned company that is the sole supplier of water to a rural town in Pennsylvania. The owner of the firm has provided the manager of the company an incentive to maximize the firm's profits, and the manager is currently selling 100,000 gallons of water per week at a price of $.05 per gallon. The marginal cost of water is zero, but the firm's average cost of this level of output is $.01 per gallon.
a. Determine Acme Water's profits.
b. Now suppose that local government imposes a price ceiling on water at a price of $.01 per gallon. Will the firm earn economic profits of zero as a result of this price ceiling? Explain.
c. Does the price ceiling of $.01 per gallon result in a shortage of water in Acme's service area?
Acme Water's profits per week: 100,000* (.05-.01)= $4,000
The economic profits will be zero due to the price ceiling because Acme ...
The expert examines Acme water price ceilings.