Table 17-36 The information in the table shows the total demand for water servic
ID: 1107508 • Letter: T
Question
Table 17-36
The information in the table shows the total demand for water service in Takoma. Assume that there are two companies operating in Takoma. Each company that provides these services incurs an annual fixed cost of $400 and that the marginal cost of providing the service to each customer is exactly $2.00. Figures listed are for an annual service contract.
Refer to Table 17-36. Assume there are two profit-maximizing water service providers in this market who had formed a successful cartel. Now assume that the cartel breaks down, so that they are not able to collude on the price and quantity of service contracts to sell. How many service contracts will be sold in total when this market reaches a Nash equilibrium?
a. 800.
b. 600.
c. 500.
d. 700.
Quantity Price 0 60 100 55 200 50 300 45 400 40 500 35 600 30 700 25 800 20 900 15 1000 10 1100 5 1200 0Explanation / Answer
Profit maximizing colluding (cartel) Q = 600 at P = $30
Total revenue = $18000
Revenue of each firm = $9000
Each firm will try to maximize their personal revenue or sales and defect from cartel agreement.
Before defecting output = 600
Each firm's output = 600/2 = 300
After defecting, each firm will increase its output marginally from 300 to 400
This makes total output = 400+400 = 800
This is not a wise decision because at this output, P = $20
Total market revenue = $16000 (which is lesser than before defecting)
Correct option: (a) 800
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.