Breakdown of a cartel agreement Consider a town in which only two residents, Darnell and Eleanor, own wells that produce water safe for drinking. Darnell and Eleanor 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. (base to table 1) Suppose Darnell and Eleanor form a cartel and behave as a monopolist. The profit-maximizing price is $___ per gallon, and the total output is _ gallons. As part of their cartel agreement, Darnell and Eleanor agree to split production equally. Therefore, Darnell's profit is $_, and Eleanor's profit is $. Suppose that Darnell and Eleanor 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, Darnell says to himself, "Eleanor 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 Darnell implements his new plan, the price of water _ to $ _ per gallon. Given Eleanor and Darnell's production levels, Darnell's profit becomes $and Eleanor's profit becomes $_. Because Darnell has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Eleanor decides that she will also increase her production to 45 gallons more than the cartel amount. After Eleanor increases her production, Darnell's profit becomes, Eleanor's profit becomes $, and total profit (the sum of the profits of Darnell and Eleanor) is now $_____.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Breakdown of a cartel agreement

Consider a town in which only two residents, Darnell and Eleanor, own wells that produce water safe for drinking. Darnell and Eleanor 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.

(base to table 1)

Suppose Darnell and Eleanor form a cartel and behave as a monopolist. The profit-maximizing price is $_____ per gallon, and the total output is _____ gallons. As part of their cartel agreement, Darnell and Eleanor agree to split production equally. Therefore, Darnell's profit is $_______, and Eleanor's profit is $______.

Suppose that Darnell and Eleanor 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, Darnell says to himself, "Eleanor 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 Darnell implements his new plan, the price of water _____ to $ _______ per gallon. Given Eleanor and Darnell's production levels, Darnell's profit becomes $______and Eleanor's profit becomes $_______.

Because Darnell has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Eleanor decides that she will also increase her production to 45 gallons more than the cartel amount.

After Eleanor increases her production, Darnell's profit becomes, Eleanor's profit becomes $______, and total profit (the sum of the profits of Darnell and Eleanor) is now $_______.

Quantity Demanded
(Gallons of water)
Price
Total Revenue
(Dollars per gallon)
(Dollars)
6.00
5.50
45
$247.50
5.00
90
$450.00
4.50
135
$607.50
4.00
180
$720.00
3.50
225
$787.50
3.00
270
$810.00
2.50
315
$787.50
2.00
360
$720.00
1.50
405
$607.50
1.00
450
$450.00
0.50
495
$247.50
540

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