Reference no: EM1337692

Northern Granite company, a company in New England, installs granite counter tops in homes. When it first entered the business, the price per foot for installing a granite counter top was $180 per square foot, and Northern Granite was making substantial economic profits. However, the market price for installing kept falling as competitors entered the market increasing supply. Northern Granite's economic profits disappeared when prices fell to $59 per square foot. The owner of NG was searching for some way to increase his profits, but he had no power to raise his price above his competitors, because doing so would just about dry up all his business. One day he was on holiday in the foothills of the mountains in New Hampshire when he discovered a large hill made of granite rock. Most of the granite installed thus far, had come from far away places such as China.

He knew the "New Hampshire" granite would appeal to consumers.
To make a long story short, his firm gained rights to the "New Hampshire granite" and as a result they maintained a monopoly position in supplying New Hampshire granite counter tops, charging a price of $199 per square foot. His firm found that producing quantity demanded at this price made its marginal revenue equal to its marginal cost of $125 per square foot, and its total average cost was just $100 per square foot.

Use a diagram to show NG's demand curve, marginal revenue curve and cost curves such that its profit maximum price is $199 per square foot. Indicate the area on the diagram that represents NG's economic profits.

The hill where NG is mining is very remote and only a few people ever go there. Still, the mining of the granite is changing the landscape. Would you consider this as an externality, and if you do, what would you suggest be done about it? Explain.