Answer to Question #186667 in Microeconomics for Haider Ali

Question

Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water:

No. of bottles Costof bottles ($)

first 1

Second 3

Third 5

Fourth 7

a. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get from these sales? Show Ernie’s producer surplus in your graph.

b. If the price rises to $6, how does quantity supplied change? How does Ernie’s

Answer 1

a. If the price of a bottle of water is $4, then Ernie can produce and sell 2 bottles of water.

The producer surplus Ernie get from these sales is:

PS = 0.5×4×2 = $4.

Ernie’s producer surplus can be shown as a triangle above the supply curve and below the price level.

b. If the price rises to $6, the quantity supplied will increase to 3 bottles. Ernie’s producer surplus will increase too.