A monopolist Clear Water Ltd bottles clean water in 10 litre containers and sells it to a small rural town. It can produce at a total cost of 10Q…

1. A monopolist Clear Water Ltd bottles clean water in 10 litre containers and sells it to a small rural town. It can produce at a total cost of 10Q per day. It faces a daily market demand curve given by 2Q = 90 – P

(1a) What is the profit-maximising price and quantity sold per day for Clear Water. Also what its profits and illustrates its equilibrium position graphically (Price, quantity and profit).

(1b) Suppose a second firm namely Pure Water Ltd enters the market. Let q1 be the output of Clear Water and q2 is the output of Pure Water. Market demand is thus now given by q1+q2 = 90 – P. Assuming Pure Water has the same costs as Clear Water. If each firm is to maximise its profits, taking its rival’s output as given (i.e., behave as Cournot oligopolists):

(i) What will be the equilibrium quantities selected by each firm?

(ii) What is the total output and what is the market price and profit for each firm?

(iii) Why is the market (public) better off as under the monopolist in question (a)?

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