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Consider a town in which only two residents, Mike and Leah, own wells that produce water safe for drinking
Consider a town in which only two residents, Mike and Leah, own wells that produce water safe for drinking. Mike and Leah can pump and sell as much water as they want at no cost. For them, revenue equals profit. The table below shows the town's demand schedule for water. If the market for water were perfectly competitive, the equilibrium price of water would be _____ per gallon, and the market output would be _____ gallons.
| Price ($) | Quantity (gallons) | Total profit ($) |
|---|---|---|
| $120 | 0 | $0 |
| $110 | 10 | $1,100 |
| $100 | 20 | $2,000 |
| $90 | 30 | $2,700 |
| $80 | 40 | $3,200 |
| $70 | 50 | $3,500 |
| $60 | 60 | $3,600 |
| $50 | 70 | $3,500 |
| $40 | 80 | $3,200 |
| $30 | 90 | $2,700 |
| $20 | 100 | $2,000 |
| $10 | 110 | $1,100 |
| $0 | 120 | $0 |
A. $0; 120
B. $100; 20
C. $120; 0
D. $60; 60
Expert Solution
The answer is D. In perfect competition all firms try and produce the same amount and sell their goods for the same price. At this point they both sell 30 gallons for $60 a piece. The reason is that this is the point where the economy is maximized not just their own firms.
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