Solve for skywalker farms profit-maximizing price

Reference no: EM13212145

skywalker Farms supplies water to the town of Mos Eisley (they are \the water company", i.e. a monopoly supplier). Given their infrastructure of pipes, treatment centers, etc, the marginal cost of supplying one gallon of water is only $.50 (and is constant), though maintaining their infrastructure has a daily xed cost of $75,000. Mos Eisley's daily demand for gallons of water is P = 20 1 1000Q.

a. Solve for Skywalker Farm's profit-maximizing price. What daily prot do they earn when they charge this price?

b. Emperor Palpatine, in a rare burst of populism, suggests regulating Skywalker Farms by capping the price they are allowed to charge at $9/gallon of water. What prot will Skywalker Farms earn at this price?

c. You are hired as a consultant to advise the Galactic Empire on this matter. Explain in words why such a price ceiling might be a good idea (i.e. could such a price ceiling be welfare-improving? Consult page 372, on natural monopoly).

Reference no: EM13212145

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