Gilberto owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more.
Here is the cost he incurs to produce each bottle of water:
Cost of the first bottle $1
Cost of the second bottle $3
Cost of the third bottle $5
Cost of the fourth bottle $7
(a) From this information, derive Ernie’s supply schedule. Graph his supply curve for bottled water.
(b) If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get from these sales? Show Ernie’s producer surplus in your graph.
(c) If the price rises to $6, how does the quantity supplied change? How does Ernie’s producer surplus change? Show these changes in your graph.