of threat of fore G 3. B of a cartel Consider a town in which only two residents
ID: 1115759 • Letter: O
Question
of threat of fore G 3. B of a cartel 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 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 Quantity Demanded Total Revenue 3.60 3.30 3.00 $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 1.80 140 175 210 280 315 0.90 0.60 0.30 420Explanation / Answer
Cartel:
Profit maximizing price = $1.8
Total output = 210 litres
Andrew's profit = 105 x 1.8 = $189
Beth's profit = $189
Andrew increases production:
Total production = 245 litres
Price of water decreases to $1.5 per litre
Andrew's profit = 140 x 1.5 = $210
Beth's profit = 105 x 1.5 = $157.5
Beth increases production:
Total production = 280 litres
Price of water decreases to $1.2 per litre
Andrew's profit = 140 x 1.2 = $168
Beth's profit = 140 x 1.2 = $168
Total profit = $336
The statement is true (Total profit/revenue decreases on increasing quantity, Quantity effect < Price effect)
This behaviour is an example of tit-for-tat strategy.
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