3. Suppose the Clean Springs Water Company has a monopoly on bottled water sales. If the price of tap water increases, what is the change in Clean Water’s profit-maximizing levels of output, price, and profit? Explain in words and with a graph.
Take a shot. What do you think.
Hint: tap water is a substitute for bottled water. If the price of tap water goes up, what should happen to the demand for bottled water.
the price will increase
If the price of tap water increases, it is expected that the demand for bottled water will increase as well, because tap water is considered a substitute for bottled water. As a result, Clean Springs Water Company, which has a monopoly on bottled water sales, should see an increase in their profit-maximizing levels of output, price, and profit.
In terms of output, Clean Springs Water Company would want to produce a higher quantity of bottled water to meet the increased demand. This is because a higher demand for their product would allow them to sell more units and generate higher profits. Therefore, the company would likely increase its production to maximize its profits.
In terms of price, the increase in demand for bottled water will give Clean Springs Water Company the ability to raise the price of their products. This is because they have a monopoly on bottled water sales, which gives them market power and control over prices. By increasing the price, the company can maximize its revenue and profit.
By increasing the quantity sold and raising the price, Clean Springs Water Company would be able to increase its profits. This is because the increased demand and higher price would result in higher revenue, while the production costs may not necessarily increase significantly. The difference between total revenue and total cost represents the profit, so if the increase in revenue outweighs the increase in costs, the company's profit would increase.
Graphically, the change in Clean Springs Water Company's profit-maximizing levels of output, price, and profit can be represented by an upward shift in the demand curve for bottled water. This shift reflects the increase in demand resulting from the higher price of tap water. Due to their monopoly power, the company would be able to set the price at a higher level, depicted as a higher point on the demand curve. The increased quantity sold and the higher price would result in higher profits for Clean Springs Water Company.
Based on the hint provided, when the price of tap water increases, the demand for bottled water is likely to increase. This is because tap water is considered a substitute for bottled water, meaning that consumers are more likely to choose bottled water when the price of tap water becomes relatively higher.
In terms of Clean Springs Water Company's profit-maximizing levels of output, price, and profit, we can make some predictions.
1. Output: Since the demand for bottled water is expected to increase, Clean Springs Water Company would likely want to increase its output to meet the rising demand. This would involve producing and selling more units of bottled water.
2. Price: With an increase in demand, Clean Springs Water Company could potentially increase the price of bottled water. As consumers are willing to pay a higher price due to the increased demand, the company could capitalize on this opportunity to maximize its profits.
3. Profit: With an increase in both output and price, Clean Springs Water Company has the potential to generate higher profits. This is because the company is not only selling more units of bottled water but also selling them at a higher price.
To represent this situation graphically, we can use a supply and demand diagram for bottled water. When the price of tap water increases, the demand curve for bottled water shifts to the right. This shift reflects an increase in demand for bottled water due to tap water becoming relatively more expensive. As a result, the equilibrium price (P1) and quantity (Q1) of bottled water increase.
The increase in quantity (Q1) represents the higher output produced by Clean Springs Water Company, while the increase in price (P1) represents the higher price the company charges for each unit of bottled water. The area between the original equilibrium price (P0) and the new equilibrium price (P1) represents the additional profit that Clean Springs Water Company can earn due to the increase in demand.
In summary, when the price of tap water increases, Clean Springs Water Company's profit-maximizing levels of output, price, and profit are likely to increase.