3. Breakdown of a cartel agreement Consider a town in which only two residents,

Question

3. Breakdown of a cartel agreement Consider a town in which only two residents, Felix and Janet, own wells that produce water safe for drinking. Felix and Janet 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 Price Quantity Demanded (Gallons of water) Total Revenue (Dollars per gallon) (Dollars) 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 45 90 135 180 225 270 315 360 405 450 495 540 0 $247.50 $450.00 $607.50 $720.00 $787.50 $810.00 $787.50 $720.00 $607.50 $450.00 $247.50 0 Suppose Felix and Janet form a cartel and behave as a monopolist. The profit-maximizing price is $ is and Janet's profit is $ per gallon, and the total output gallons. As part of their cartel agreement, Felix and Janet agree to split production equally. Therefore, Felix's profit is $ Suppose that Felix and Janet 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, Felix says to himself, "Janet and I aren't the best of friends anyway. If I increase my production to 45

Explanation / Answer

a) $ 3 because profit is maximum at this price.

b) 270 units

c) Felix profit = 810/2 = 405

Janet's profit = 810/2 = 405

d) Price decreases to $ 2.50

e) Felix's profit = (135 + 35 units) x 2.50 = $ 425

Janet's profit = 135 x 2.50 = $ 337.5

f) Now price will be $ 2

Felix's profit = 170 x 2 = $ 340

Janet's profit = 170 x 2 = $ 340

g) Total profit = 340 + 340 = $ 680

h) False

i) Tit-for-tat strategy

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.