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.
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: Monopolistic Competition
Section: Chapter Questions
Problem 4PA
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