6. Breakdown of a cartel agreement Consider a town in which only two residents, Rajiv and Simone, own wells that produce water safe for drinking. Rajiv and Simone 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 (Dollars per gallon) Quantity Demanded Total Revenue (Gallons of water) (Dollars) 5.40 0 0 4.95 25 124 4.50 50 225 4.05 75 304 3.60 100 360 3.15 125 394 2.70 150 405 2.25 175 394 1.80 200 360 1.35 225 304 0.90 250 225 0.45 275 124 0 300 0 per gallon, and the total Suppose Rajiv and Simone form a cartel and behave as a monopolist. The profit-maximizing price is $ output is gallons. As part of their cartel agreement, Rajiv and Simone agree to split production equally. Therefore, Rajiv's profit is and Simone's profit is $ s Suppose that Rajiv and Simone 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, Rajiv says to himself, "Simone and I aren't the best of friends anyway. If I increase my production to 25 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." to $ and Simone's profit becomes $ After Rajiv implements his new plan, the price of water Rajiv's profit becomes $ per gallon. Given Simone and Rajiv's production levels, Because Rajiv has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Simone decides that she will also increase her production to 25 gallons more than the cartel amount. After Simone increases her production, Rajiv's profit becomes $ sum of the profits of Rajiv and Simone) is now $ Rajiv and S both realize predatory pricing tying Rajiv's profi amount.) Neither Raji example of a Nash equilibrium resale price maintenance Simone's profit becomes $ and total profit (the their cartel agreement and increased production by 25 gallons more than the cartel amount. However, they ease output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider ns more than the cartel amount compared to his profit when he produces 25 gallons more than the cartel ve to increase output further, nor does either have an incentive to decrease output. This outcome is an

6. Breakdown of a cartel agreement Consider a town in which only two residents, Rajiv and Simone, own wells that produce water safe for drinking. Rajiv and Simone 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 (Dollars per gallon) Quantity Demanded Total Revenue (Gallons of water) (Dollars) 5.40 0 0 4.95 25 124 4.50 50 225 4.05 75 304 3.60 100 360 3.15 125 394 2.70 150 405 2.25 175 394 1.80 200 360 1.35 225 304 0.90 250 225 0.45 275 124 0 300 0 per gallon, and the total Suppose Rajiv and Simone form a cartel and behave as a monopolist. The profit-maximizing price is $ output is gallons. As part of their cartel agreement, Rajiv and Simone agree to split production equally. Therefore, Rajiv's profit is and Simone's profit is $ s Suppose that Rajiv and Simone 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, Rajiv says to himself, "Simone and I aren't the best of friends anyway. If I increase my production to 25 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." to $ and Simone's profit becomes $ After Rajiv implements his new plan, the price of water Rajiv's profit becomes $ per gallon. Given Simone and Rajiv's production levels, Because Rajiv has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Simone decides that she will also increase her production to 25 gallons more than the cartel amount. After Simone increases her production, Rajiv's profit becomes $ sum of the profits of Rajiv and Simone) is now $ Rajiv and S both realize predatory pricing tying Rajiv's profi amount.) Neither Raji example of a Nash equilibrium resale price maintenance Simone's profit becomes $ and total profit (the their cartel agreement and increased production by 25 gallons more than the cartel amount. However, they ease output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider ns more than the cartel amount compared to his profit when he produces 25 gallons more than the cartel ve to increase output further, nor does either have an incentive to decrease output. This outcome is an

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter14: Monopoly

Section: Chapter Questions

Problem 1PA

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