Question about price ceiling

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Reference no: EM1376013

Acme Water is a privately owned firm that is sole supplier of water to a rural town in Pennsylvania. The owner of company has provided the manager of firm an incentive to maximize company's profits, and the manager is currently selling 100,000 gallons of water per week at a price of $.05 per gallon. The marginal cost of water is zero, but the company's average cost of this level of output is $.01 per gallon.
a. Determine Acme Water's profits.
b. Now suppose that local government imposes a price ceiling on water at a price of $.01 per gallon. Will the firm earn economic profits of zero as a result of this price ceiling? Explain.
c. Does the price ceiling of $.01 per gallon result in a shortage of water in Acme's service area?

Reference no: EM1376013

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