Consider a town in which only two residents, Gilberto and Juanita, own wells that produce water safe for drinking. Gilberto and Juanita 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 Quantity Demanded Total Revenue (Dollars per gallon) (Gallons of water) (Dollars) 4.80 4.40 45 $198.00 4.00 90 $360.00 3.60 135 $486.00 3.20 180 $576.00 2.80 225 $630.00 2.40 270 $648.00 2.00 315 $630.00 1.60 360 $576.00 1.20 405 $486.00 0.80 450 $360.00 0.40 495 $198.00 540 Suppose Gilberto and Juanita form a cartel and behave as a monopolist. The profit-maximizing price is $ per gallon, and the total putput is gallons. As part of their cartel agreement, Gilberto and Juanita agree to split production equally. Therefore, Gilberto's profit is and Juanita's profit is $

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Chapter1: Making Economics Decisions
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Consider a town in which only two residents, Gilberto and Juanita, own wells that produce water safe for drinking. Gilberto and Juanita 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
Quantity Demanded
Total Revenue
(Dollars per gallon)
(Gallons of water)
(Dollars)
4.80
4.40
45
$198.00
4.00
90
$360.00
3.60
135
$486.00
3.20
180
$576.00
2.80
225
$630.00
2.40
270
$648.00
2.00
315
$630.00
1.60
360
$576.00
1.20
405
$486.00
0.80
450
$360.00
0.40
495
$198.00
540
Suppose Gilberto and Juanita 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, Gilberto and Juanita agree to split production equally. Therefore, Gilberto's profit is
$
and Juanita's profit is $
Suppose that Gilberto and Juanita 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, Gilberto says to himself, "Juanita 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 Gilberto implements his new plan, the price of water
to $
per gallon. Given Juanita and Gilberto's production
levels, Gilberto's profit becomes
and Juanita's profit becomes $
Transcribed Image Text:Consider a town in which only two residents, Gilberto and Juanita, own wells that produce water safe for drinking. Gilberto and Juanita 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 Quantity Demanded Total Revenue (Dollars per gallon) (Gallons of water) (Dollars) 4.80 4.40 45 $198.00 4.00 90 $360.00 3.60 135 $486.00 3.20 180 $576.00 2.80 225 $630.00 2.40 270 $648.00 2.00 315 $630.00 1.60 360 $576.00 1.20 405 $486.00 0.80 450 $360.00 0.40 495 $198.00 540 Suppose Gilberto and Juanita 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, Gilberto and Juanita agree to split production equally. Therefore, Gilberto's profit is $ and Juanita's profit is $ Suppose that Gilberto and Juanita 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, Gilberto says to himself, "Juanita 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 Gilberto implements his new plan, the price of water to $ per gallon. Given Juanita and Gilberto's production levels, Gilberto's profit becomes and Juanita's profit becomes $
Because Gilberto has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Juanita decides
that she will also increase her production to 45 gallons more than the cartel amount.
After Juanita increases her production, Gilberto's profit becomes
Juanita's profit becomes $
and total profit (the
sum of the profits of Gilberto and Juanita) is now $
True or False: Based on the fact that both Gilberto and Juanita increased production from the initial cartel quantity, you know that the output effect
was smaller than the price effect at that quantity.
True
False
Note that Gilberto and Juanita started by behaving cooperatively. However, once Gilberto decided to cheat, Juanita decided to cheat as well. In other
words, Juanita's output decisions are based on Gilberto's actions.
This behavior is an example of
Transcribed Image Text:Because Gilberto has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Juanita decides that she will also increase her production to 45 gallons more than the cartel amount. After Juanita increases her production, Gilberto's profit becomes Juanita's profit becomes $ and total profit (the sum of the profits of Gilberto and Juanita) is now $ True or False: Based on the fact that both Gilberto and Juanita increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity. True False Note that Gilberto and Juanita started by behaving cooperatively. However, once Gilberto decided to cheat, Juanita decided to cheat as well. In other words, Juanita's output decisions are based on Gilberto's actions. This behavior is an example of
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