2. A duopoly example suppose that there is a town in which only two of the resid
ID: 1104140 • Letter: 2
Question
2. A duopoly example suppose that there is a town in which only two of the residents, Stan and Eleanor, own weils that produce water sofe for drinking, and suppose that Stan and Eleanor can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water. Total Revenue Price per Gallon Gallons Demanded (= Total Profit) ($) 12 300 600 900 1,200 1,500 1,800 2,100 2,400 2,700 3,000 3,300 3,600 3,300 6,000 8,100 9,600 10,500 10,800 10,500 9,600 8,100 6,000 3,300 10 9 Suppose Stan and Eleanor form a cartel and behave as a monopolist. Now, the profit-maximizing price is$2 per gallon, and the total output is 1,800 gallions. As part of their cartel agreement, Stan and Eleanor agree to split production equally. Therefore, Stam's profit is $3,000 and Eleanor's profit is $3,600 Suppose that Stan and Eleanor have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before golng to sleep, Stan says to himself, "Eleanor and I aren't the best of friends anyway. If I increase my production to 300 gallons more than the cartel amount, I can increase my profit, even though her profit goes down. I will do that starting tomorrow." After Stan implements his new plan, the price of water increases to $9 per gallon. Given Eleanor's and Stan's production levels, Stan's profit becomes l$4,500. Eleanor's profit becomes $5,400 Because Stan has devlated from the cartel agreement and Increased his output of water to 300 gallons more than the cartel amount, Eleanor decides that she will also increase her production to 300 gallons more than the cartel amount. After Eleanor increases her production, Stan's profit becomes $4,800 and Eleanors profit becomes $3,600 and total profit (the sum of the profits of Stan and Eleanor) is now $10,800Explanation / Answer
a) Profit maximising price = $ 6
b) 1800 gallons
c) Stan's profit = 10800/2 = $ 5400
d) Eleanor's profit = 10800/2 = $ 5400
e) Price of water goes down to $ 5
f) Stan's profit = 5 x (900 + 300) = 5 x 1200 = $ 6000
g) Eleanor's profit = 5 x 900 = $ 4500
h) Stan's profit = 4 x 1200 = $ 4800
i) Eleanor's profit = 4 x 1200 = $ 4800
j) Total profit = 4800 + 4800 = $ 9,600
k) False
l) a tit-for-tat strategy
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