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) 4.80 4.40 4.00 3.60 3.20 2.80 2.40 2.00 1.60 1.20 0.80 0.40 0 Quantity Demanded (Gallons of water) 0 35 70 105 140 175 210 245 280 315 350 385 420 Total Revenue (Dollars) 0 $154.00 $280.00 $378.00 $448.00 $490.00 $504.00 $490.00 $448.00 $378.00 $280.00 $154.00 0 Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is output is per gallon, and the total 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 S 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 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Gregor implements his new plan, the price of water_ levels, Gregor's profit becomes S to S and Haidy's profit becomes S per gallon. Given Haidy and Gregor's production Because Gregor has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Haidy decides that she will also increase her production to 35 gallons more than the cartel amount. After Haidy increases her production, Gregor's profit becomes S sum of the profits of Gregor and Haidy) is now S Haidy's profit becomes $ and total profit (the
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) 4.80 4.40 4.00 3.60 3.20 2.80 2.40 2.00 1.60 1.20 0.80 0.40 0 Quantity Demanded (Gallons of water) 0 35 70 105 140 175 210 245 280 315 350 385 420 Total Revenue (Dollars) 0 $154.00 $280.00 $378.00 $448.00 $490.00 $504.00 $490.00 $448.00 $378.00 $280.00 $154.00 0 Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is output is per gallon, and the total 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 S 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 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Gregor implements his new plan, the price of water_ levels, Gregor's profit becomes S to S and Haidy's profit becomes S per gallon. Given Haidy and Gregor's production Because Gregor has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Haidy decides that she will also increase her production to 35 gallons more than the cartel amount. After Haidy increases her production, Gregor's profit becomes S sum of the profits of Gregor and Haidy) is now S Haidy's profit becomes $ and total profit (the
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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)
4.80
4.40
4.00
3.60
3.20
2.80
2.40
2.00
1.60
1.20
0.80
0.40
0
Quantity Demanded
(Gallons of water)
0
35
70
105
140
175
210
245
280
315
350
385
420
Total Revenue
(Dollars)
0
$154.00
$280.00
$378.00
$448.00
$490.00
$504.00
$490.00
$448.00
$378.00
$280.00
$154.00
0
Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is $
output is
S
per gallon, and the total
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 $
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
35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."
After Gregor implements his new plan, the price of water
levels, Gregor's profit becomes S
to
and Haidy's profit becomes S
per gallon. Given Haidy and Gregor's production
Because Gregor has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Haidy decides
that she will also increase her production to 35 gallons more than the cartel amount.
After Haidy increases her production, Gregor's profit becomes S
sum of the profits of Gregor and Haidy) is now
, Haidy's profit becomes $
, and total profit (the
Transcribed Image Text: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.
True
False
Gregor and Haidy have each cheated on their cartel agreement and increased production by 35 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 70 gallons more than the cartel amount compared to his profit when he produces 35 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
example of
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