1.Breakdown of a cartel agreement Consider a town in which only two residents, T
ID: 1124833 • Letter: 1
Question
1.Breakdown of a cartel agreement Consider a town in which only two residents, Tim and Alyssa, own wells that produce water safe for drinking. Tim and Alyssa 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) 3.60 3.30 3.00 2.70 2.40 2.10 1.80 1.50 1.20 0.90 0.60 0.30 0 35 70 105 140 175 210 245 280 315 350 385 420 $115.50 $210.00 $283.50 $336.00 $367.50 $378.00 $367.50 $336.00 $283.50 $210.00 $115.50Explanation / Answer
Answer : The profit maximising price is $1.80 per gallon because here the profit is maximum and total output produced is 210 gallons. Tim and Alyssa split production equally. Therefore, Tim profit is $189 and Alyssa profit is $189.
After Tim implements his new plans, the price of war decreases to $1.50 per gallon. Given Alyss and Tim production the tim profit becomes $210 (1.50*140) and Alyss profit is $157.5
After Alyssa increases her production, Tim profit becomes $168 (Decreases) , Alyssa profit become $168 and total profit is now $336.
The statement is true, as price has been decreased more as quantity demanded increased because water is limited resources and demanded does not flucates with price.
Neither Tim nor Alyssa has an incentive to increase output further, nor does either has an incentive to decreased output. This outcome is an example of Nash equiliburm here the cartel formed is the best solution of the entire outcome.
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