Consider a town in which only two residents, Hubert and Kate, own wells that produce water safe for drinking. Hubert and Kate 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. S 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 25 50 75 100 125 150 175 200 225 250 275 300 Suppose Hubert and Kate form a cartel and behave as a monopolist. The profit-maximizing price is $ gallons. As part of their cartel agreement, Hubert and Kate agree to split production equally. Therefore, Hubert's profit is , and Kate's profit is $ Total Revenue (Dollars) 0 $123.75 $225.00 $303.75 $360.00 $393.75 $405.00 $393.75 $360.00 $303.75 $225.00 $123.75 0 Suppose that Hubert and Kate 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, Hubert says to himself, "Kate and I aren't the best of friends anyway. If I increase my production to 25 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Hubert implements his new plan, the price of water Hubert's profit becomes $ and Kate's profit becomes per gallon, and the total output to After Kate increases her production, Hubert's profit becomes $ of the profits of Hubert and Kate) is now $ per gallon. Given Kate and Hubert's production levels, Because Hubert has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Kate decides that she will also increase her production to 25 gallons more than the cartel amount. , Kate's profit becomes $ and total profit (the sum True or False: Based on the fact that both Hubert and Kate increased production from the initial cartel quantity, you know that the output effect was
Consider a town in which only two residents, Hubert and Kate, own wells that produce water safe for drinking. Hubert and Kate 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. S 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 25 50 75 100 125 150 175 200 225 250 275 300 Suppose Hubert and Kate form a cartel and behave as a monopolist. The profit-maximizing price is $ gallons. As part of their cartel agreement, Hubert and Kate agree to split production equally. Therefore, Hubert's profit is , and Kate's profit is $ Total Revenue (Dollars) 0 $123.75 $225.00 $303.75 $360.00 $393.75 $405.00 $393.75 $360.00 $303.75 $225.00 $123.75 0 Suppose that Hubert and Kate 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, Hubert says to himself, "Kate and I aren't the best of friends anyway. If I increase my production to 25 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Hubert implements his new plan, the price of water Hubert's profit becomes $ and Kate's profit becomes per gallon, and the total output to After Kate increases her production, Hubert's profit becomes $ of the profits of Hubert and Kate) is now $ per gallon. Given Kate and Hubert's production levels, Because Hubert has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Kate decides that she will also increase her production to 25 gallons more than the cartel amount. , Kate's profit becomes $ and total profit (the sum True or False: Based on the fact that both Hubert and Kate increased production from the initial cartel quantity, you know that the output effect was
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, Hubert and Kate, own wells that produce water safe for drinking. Hubert and Kate 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.
is
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
Suppose Hubert and Kate 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, Hubert and Kate agree to split production equally. Therefore, Hubert's profit is
and Kate's profit is $
Quantity Demanded
(Gallons of water)
0
25
50
75
100
125
150
175
200
225
250
275
300
Suppose that Hubert and Kate 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, Hubert says to himself, "Kate and I aren't the best of friends anyway. If I increase my production to 25
gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."
Total Revenue
(Dollars)
0
$123.75
$225.00
$303.75
$360.00
$393.75
$405.00
$393.75
$360.00
$303.75
$225.00
$123.75
0
After Hubert implements his new plan, the price of water
Hubert's profit becomes $
and Kate's profit becomes $
After Kate increases her production, Hubert's profit becomes $
of the profits of Hubert and Kate) is now $
True
Because Hubert has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Kate decides
that she will also increase her production to 25 gallons more than the cartel amount.
False
to $
This behavior is an example of
per gallon. Given Kate and Hubert's production levels,
I
True or False: Based on the fact that both Hubert and Kate increased production from the initial cartel quantity, you know that the output effect was
larger than the price effect at that quantity.
Kate's profit becomes
and total profit (the sum
Note that Hubert and Kate started by behaving cooperatively. However, once Hubert decided to cheat, Kate decided to cheat as well. In other words,
Kate's output decisions are based on Hubert's actions.
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