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, Jacques and Kyoko, own wells that produce water safe for drinking. Jacques and Kyoko 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 Total Revenue (Dollars per gallon) (Gallons of water) (Dollars) 5.40 4.95 4.50 4.05 3.60 3.15 2.70 2.25 1.80 1.35 0.90 0.45 0 80 120 160 200 240 280 320 360 400 440 480 $198.00 $360.00 $486.00 $576.00 $630.00 $648.00 $630.00 $576.00 $486.00 $360.00 $198.00

Explanation / Answer

Ans)

Profit maximizing price is $2.70
Output=240
Jacques profit=648/2=$324
Since the total revenue is equal to the profit we see that maximum total revenue or profit is $648 with quantity 240 at a price of $2.70

Now Jacques will produce 120+4=160
So new quantity (total) will be 280 with a price of 2.25

falls to $2.25
Jacques profit=160*2.25=360
Kyoko's profit=120*2.25=270

Now Kyoko produce 120+40=160
So new quantity (total) will be 320 with a price of 1.80

Jacques profit=160*1.80=288
Kyoko's profit=160*1.80=288
Total profit=288+288=576

TRUE

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