Suppose Sean and Yvette form a cartel and behave as a monopolist. The profit-maximizing price is $per gallon, and the total outputisgallons. As part of their cartel agreement, Sean and Yvette agree to split production equally. Therefore, Sean's profit is sand Yvette's profit is SSuppose that Sean and Yvette have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopolyquantity. Then one night before going to sleep, Sean says to himself, "Yvette and I aren't the best of friends anyway. If I increase my production to 45gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."After Sean implements his new plan, the price of waterto $per gallon. Given Yvette and Sean's production levels,Sean's profit becomes sand Yvette's profit becomes $Because Sean has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Yvette decidesthat she will also increase her production to 45 gallons more than the cartel amount.After Yvette increases her production, Sean's profit becomes sof the profits of Sean and Yvette) is now S,Yvette's profit becomesand total profit (the sumSean and Yvette have each cheated on their cartel agreement and increased production by 45 gallons more than the cartel amount. However, theyboth realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, considerSean's profit when he produces 90 gallons more than the cartel amount compared to his profit when he produces 45 gallons more than the cartelamount.)Neither Sean nor Yvette has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an exampleof 6. Breakdown of a cartel agreementConsider a town in which only two residents, Sean and Yvette, own wells that produce water safe for drinking. Sean and Yvette can pump and sell asmuch water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water.PriceQuantity Demanded Total Revenue(Dollars per gallon)(Gallons of water)(Dollars)6.005.50452485.00904504.501356084.001807203.502257883.002708102.503157882.003607201.504056081.004504500.50495248540

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Suppose Sean and Yvette form a cartel and behave as a monopolist. The profit-maximizing price is s per gallon, and the total output gallons. As part of their cartel agreement, Sean and Yvette agree to split production equally. Therefore, Sean's profit is S is and Yvette's profit is s Suppose that Sean and Yvette 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, Sean says to himself, "Yvette and I aren't the best of friends anyway. If I increase my production to 45 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Sean implements his new plan, the price of water to s per gallon. Given Yvette and Sean's production levels, Sean's profit becomes s and Yvette's profit becomes s Because Sean has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Yvette decides that she will also increase her production to 45 gallons more than the cartel amount. After Yvette increases her production, Sean's profit becomes s , Yvette's profit becomes S and total profit (the sum of the profits of Sean and Yvette) is now S Sean and Yvette have each cheated on their cartel agreement and increased production by 45 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Sean's profit when he produces 90 gallons more than the cartel amount compared to his profit when he produces 45 gallons more than the cartel amount.) Neither Sean nor Yvette has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter15: Monopoly

Section: Chapter Questions

Problem 7PA