A monopolistic seller of fairy dust faces the following inverse demand curve: P = 100 - Q, where Q is smidgens of fairy dust per week. Fairy dust can be produced at a constant marginal cost of $20 per smidgen.
a. Graph this demand curve. Then, calculate the profit-maximizing price and quantity of fairy dust. Finally, calculate the seller's profit.
b. A midsummer's druid festival greatly increases the demand for fairy dust, so that the price any particular consumer is willing to pay doubles. The inverse demand curve is now given by P = 200 - 2Q. Verify graphically that demand has increased and calculate the new profit-maximizing price and quantity.
c. A tour bus full of druids took a wrong left turn at Albuquerque and showed up in town by accident. Now there are twice as many buyers at any price as there were before, and the inverse demand the seller faces is given by P = 100 - 0.5Q. Verify graphically that demand has increased and calculate the new profit-maximizing price and quantity.
d. Suppose that the demand shift the seller faces is a parallel shift of the inverse demand curve such as P = 150 - Q. Verify graphically that demand has increased and calculate the new profit-maximizing price and quantity.
e. What do your answers to (b), (c), and (d) indicate about how monopolistic suppliers respond to increases in demand?