P1 3. Assume that the islanders of Bora Bora drink beer, which is sold only in bars that belongto a bartenders' cartel. The marginal cost of a glass of beer is $1.00, and there are nofixed costs. There are 20,000 islanders, each of whom have the following individualinverse demand curve for beer every Saturday night (the only time the islanders drinkbeer):P = 10-0.5QDa. The beer cartel sets specific quantities of beer to be sold Saturday night.Everyone knows that any bartender who sells more than the cartel-determinedquantity of beer gets fed to the sharks. Explain how this threat actually makesbartenders better off.b. What beer price will maximize the collective profits of the cartel members?c.Suppose a bartender comes up with the alternative idea of selling patrons anightly "drinking license" that would have to be paid upon entering a bar. Howmuch could each of the bartenders charge such a license if they left the per-glass beer price at the previous, collusive level? How much profit would thecartel make?d. If instead bartenders set the license fee and the beer price together so as tomaximize profits, how much will they charge for the license and for a glass ofbeer, and how much profit will the cartel make?

P=10-0.5QdThere are 20,000 islandersMC=1 per glassThere is no fixed cost

3. Assume that the islanders of Bora Bora drink beer, which is sold only in bars that belong to a bartenders' cartel. The marginal cost of a glass of beer is $1.00, and there are no fixed costs. There are 20,000 islanders, each of whom have the following individual inverse demand curve for beer every Saturday night (the only time the islanders drink beer): P= 10-0.5QD

3. Assume that the islanders of Bora Bora drink beer, which is sold only in bars that belong to a bartenders' cartel. The marginal cost of a glass of beer is $1.00, and there are no fixed costs. There are 20,000 islanders, each of whom have the following individual inverse demand curve for beer every Saturday night (the only time the islanders drink beer): P= 10-0.5QD

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

3. Assume that the islanders of Bora Bora drink beer, which is sold only in bars that belong
to a bartenders' cartel. The marginal cost of a glass of beer is $1.00, and there are no
fixed costs. There are 20,000 islanders, each of whom have the following individual
inverse demand curve for beer every Saturday night (the only time the islanders drink
beer):
P = 10-0.5QD
a. The beer cartel sets specific quantities of beer to be sold Saturday night.
Everyone knows that any bartender who sells more than the cartel-determined
quantity of beer gets fed to the sharks. Explain how this threat actually makes
bartenders better off.
b. What beer price will maximize the collective profits of the cartel members?
c.
Suppose a bartender comes up with the alternative idea of selling patrons a
nightly "drinking license" that would have to be paid upon entering a bar. How
much could each of the bartenders charge such a license if they left the per-
glass beer price at the previous, collusive level? How much profit would the
cartel make?
d. If instead bartenders set the license fee and the beer price together so as to
maximize profits, how much will they charge for the license and for a glass of
beer, and how much profit will the cartel make?

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