Suppose that the demand curve for mineral water is given by p = 50 - 16q, where p is the price per bottle paid by consumers and q is the number of bottles purchased by consumers. Mineral water is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer, who is able to produce mineral water at zero cost. The producer charges the distributor a price of c per bottle. Given his marginal cost of c per unit, the distributor chooses an output to maximize his own profits. Knowing that this is what the distributor will do, the producer sets his price c so as to maximize his revenue. The price paid by consumers under this arrangement is

Question

Quizplus · Accepted Answer

To maximize his profits, the distributor will choose an output that equates marginal revenue (MR) with marginal cost (MC). Since the distributor faces a downward-sloping demand curve, his marginal revenue will be less than the price he charges consumers. Therefore, we need to find the distributor's marginal cost function in terms of price:
p = 50 - 16q
q = (50 - p)/16
MC = c
Substituting for q, we get:
MC = c = (50 - p)/16
Solving for p, we get:
p = $37.50
Therefore, the price paid by consumers is $37.50.

Suppose That the Demand Curve for Mineral Water Is Given