Keep the Highest: 1 9. Breakdown of a cartel agreement Consider a town in which
ID: 1110675 • Letter: K
Question
Keep the Highest: 1 9. Breakdown of a cartel agreement Consider a town in which only two residents, Andrew and Beth, own wells that produce water safe for drinking. Andrew and Beth can pump and s 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 Price Quantity Demanded (Gallons of water) Total Revenue (Dollars) (Dollars per gallon) 3.60 3.30 3.00 35 70 105 140 175 210 245 280 315 $115.50 $210.00 $283.50 336.00 367.50 $378.00 $367.50 $336.00 $283.50 $210.00 115.50 2.40 2.10 1.80 1.50 1.20 0.60 385 420 Suppose Andren and Beth form a cartel and behave as a monopolist. The profit-maximicing price is output is gallons. As part of their carted agreement. Andre-and Beth apree to spit producton enat. Thom per gallon, and the total , and Beth's profit is S ali Suppose that Andresw and Beth have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Andrew says to himsef, "Beth and I aren't the best of friends anyway. If 1 increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow.Explanation / Answer
Cartel:
Profit maximizing price = $1.8 per gallon (Total revenue is maximum at this price)
Total output = 210 gallons (Each produces 105 gallons)
Andrew's profit =$189 (=378/2)
Beth's profit = $189
Andrew increases production by 35 gallons:
Price of water decreases to $1.5 per gallon.
Andrew's profit = 140 x 1.5 = $210
Beth's profit = 105 x 1.5 = $157.5
Beth increases production by 35 gallons:
Andrew's profit = 140 x 1.2 = $168
Beth's profit = 140 x 1.2 = $168
Total profit = $336
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.