Suppose Ralph and Ed have the only store that sells toilet bowls in northern Maine

Since Ralph and Ed have the only store that sells toilet bowls and they have a high reputation and their nearest competitor is also faraway they behave like a monopolist in the market for toilet bowls in their area. Thus, the equilibrium output and price charged by them are the same as those charged by a monopolist. They produce quantity at the level where their marginal cost (MC1) is equal to the marginal revenue (MR) at point A. The corresponding quantity supplied is Qe and the price charged is Pe. The profit earned by them is the area of rectangle DCBPe which is calculated by subtracting the total cost of production (DCQeO) from total revenue (PeBQeO).

Now, the new law passed which requires devices to be installed which reduces the water used per flush increases the cost of production for the producers. Thus, the average total cost curve (ATC) shifts upward from ATC1 to ATC2 and MC also increases which shifts the MC curve from MC1 to MC2. The new equilibrium is given by the point where MC2 intersects the MR curve at point H. The profit-maximizing price is P1 and the quantity is Q1. The profit is now given by the area P1EFG.

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