3. Breakdown of a cartel agreement Consider a town in which only two residents, Gregor and Haidy, own wells that produce water safe for drinking. Gregor and Haidy 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) 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 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 450 495 540 Total Revenue (Dollars) 0 $222.75 $405.00 $546.75 $648.00 $708.75 $729.00 $700.75 $648.00 $546.75 $405.00 $222.75 Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is 5 per gallon, and the total output gallons. As part of their cartel agreement, Gregor and Haidy agree to split production equally. Therefore, Gregor's profit is and Haidy's profit is After Gregor implements his new plan, the price of water Gregor's profit becomes Suppose that Gregor and Haidy 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, Gregor says to himself, "Haidy and I aren't the best of friends anyway. If 1 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. per gallon. Given Haidy and Gregor's production levels, and Haidy's profit becomes Because Gregor has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Haidy decides that she will also increase her production to 45 gallons more than the cartel amount.
3. Breakdown of a cartel agreement Consider a town in which only two residents, Gregor and Haidy, own wells that produce water safe for drinking. Gregor and Haidy 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) 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 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 450 495 540 Total Revenue (Dollars) 0 $222.75 $405.00 $546.75 $648.00 $708.75 $729.00 $700.75 $648.00 $546.75 $405.00 $222.75 Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is 5 per gallon, and the total output gallons. As part of their cartel agreement, Gregor and Haidy agree to split production equally. Therefore, Gregor's profit is and Haidy's profit is After Gregor implements his new plan, the price of water Gregor's profit becomes Suppose that Gregor and Haidy 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, Gregor says to himself, "Haidy and I aren't the best of friends anyway. If 1 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. per gallon. Given Haidy and Gregor's production levels, and Haidy's profit becomes Because Gregor has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Haidy decides that she will also increase her production to 45 gallons more than the cartel amount.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:After Haidy increases her production, Gregor's profit becomes
of the profits of Gregor and Haidy) is now
Haidy's profit becomes
O True
O Faise
and total profit (the sum
True or False: Based on the fact that both Gregor and Haidy increased production from the initial cartel quantity, you know that the output effect was
smaller than the price effect at that quantity
Gregor and Haidy 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
Gregor'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 Gregor nor Haidy has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an
Transcribed Image Text:3. Breakdown of a cartel agreement
Consider a town in which only two residents, Gregor and Haidy, own wells that produce water safe for drinking. Gregor and Haidy 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)
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
Quantity Demanded
(Gallons of water)
45
90
135
S
180
225
270
315
360
405
450
495
540
Total Revenue
(Dollars)
0
$222.75
$405.00
$546.75
$648.00
$708.75
$729.00
$708.75
$648.00
$546.75
$405.00
$222.75
0
Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is
per gallon, and the total output
gallons. As part of their cartel agreement, Gregor and Haidy agree to split production equally. Therefore, Gregor's profit is
and Haidy's profit is
After Gregor implements his new plan, the price of water
Gregor's profit becomes
Suppose that Gregor and Haidy 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, Gregor says to himself, "Haidy 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."
and Haidy's profit becomes
per gallon. Given Haidy and Gregor's production levels,
Because Gregor has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Haidy decides
that she will also increase her production to 45 gallons more than the cartel amount.
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