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Consider a town in which only two residents, Nick and Rosa, own wells that produce water safe for drinking. Nick and Rosa 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) 5.40 4.95 25 $123.75 4.50 50 $225.00 4.05 75 $303.75 3.60 100 $360.00 3.15 125 $393.75 2.70 150 $405.00 2.25 175 $393.75 1.80 200 $360.00 1.35 225 $303.75 0.90 250 $225.00 0.45 275 $123.75 300 Suppose Nick and Rosa 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, Nick and Rosa agree to split production equally. Therefore, Nick's profit is $ and Rosa's profit is $ Suppose that Nick and Rosa 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, Nick says to himself, "Rosa 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 Nick implements his new plan, the price of water to per gallon. Given Rosa and Nick's production levels, Nick's profit becomes and Rosa's profit becomes Because Nick has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Rosa decides that she will also increase her production to 25 gallons more than the cartel amount. After Rosa increases her production, Nick's profit becomes Rosa's profit becomes $ and total profit (the sum of the profits of Nick and Rosa) is now $

Consider a town in which only two residents, Nick and Rosa, own wells that produce water safe for drinking. Nick and Rosa 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) 5.40 4.95 25 $123.75 4.50 50 $225.00 4.05 75 $303.75 3.60 100 $360.00 3.15 125 $393.75 2.70 150 $405.00 2.25 175 $393.75 1.80 200 $360.00 1.35 225 $303.75 0.90 250 $225.00 0.45 275 $123.75 300 Suppose Nick and Rosa 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, Nick and Rosa agree to split production equally. Therefore, Nick's profit is $ and Rosa's profit is $ Suppose that Nick and Rosa 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, Nick says to himself, "Rosa 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 Nick implements his new plan, the price of water to per gallon. Given Rosa and Nick's production levels, Nick's profit becomes and Rosa's profit becomes Because Nick has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Rosa decides that she will also increase her production to 25 gallons more than the cartel amount. After Rosa increases her production, Nick's profit becomes Rosa's profit becomes $ and total profit (the sum of the profits of Nick and Rosa) is now $

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Because Nick has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Rosa decides that she will also increase her production to 25 gallons more than the cartel amount. After Rosa increases her production, Nick's profit becomes $ Rosa's profit becomes $ and total profit (the sum of the profits of Nick and Rosa) is now True or False: Based on the fact that both Nick and Rosa increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. O True O False Nick and Rosa have each cheated on their cartel agreement and increased production by 25 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 Nick's profit when he produces 50 gallons more than the cartel amount compared to his profit when he produces 25 gallons more than the cartel amount.) Neither Nick nor Rosa has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of
Transcribed Image Text:Because Nick has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Rosa decides that she will also increase her production to 25 gallons more than the cartel amount. After Rosa increases her production, Nick's profit becomes $ Rosa's profit becomes $ and total profit (the sum of the profits of Nick and Rosa) is now True or False: Based on the fact that both Nick and Rosa increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. O True O False Nick and Rosa have each cheated on their cartel agreement and increased production by 25 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 Nick's profit when he produces 50 gallons more than the cartel amount compared to his profit when he produces 25 gallons more than the cartel amount.) Neither Nick nor Rosa has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of
3. Breakdown of a cartel agreement Consider a town in which only two residents, Nick and Rosa, own wells that produce water safe for drinking. Nick and Rosa 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) 5.40 4.95 25 $123.75 4.50 50 $225.00 4.05 75 $303.75 3.60 100 $360.00 3.15 125 $393.75 2.70 150 $405.00 2.25 175 $393.75 1.80 200 $360.00 1.35 225 $303.75 0.90 250 $225.00 0.45 275 $123.75 300 Suppose Nick and Rosa 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, Nick and Rosa agree to split production equally. Therefore, Nick's profit is $ and Rosa's profit is $ Suppose that Nick and Rosa 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, Nick says to himself, "Rosa 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 Nick implements his new plan, the price of water to per gallon. Given Rosa and Nick's production levels, Nick's profit becomes and Rosa's profit becomes Because Nick has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Rosa decides that she will also increase her production to 25 gallons more than the cartel amount. After Rosa increases her production, Nick's profit becomes $ Rosa's profit becomes $ and total profit (the sum of the profits of Nick and Rosa) is now $
Transcribed Image Text:3. Breakdown of a cartel agreement Consider a town in which only two residents, Nick and Rosa, own wells that produce water safe for drinking. Nick and Rosa 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) 5.40 4.95 25 $123.75 4.50 50 $225.00 4.05 75 $303.75 3.60 100 $360.00 3.15 125 $393.75 2.70 150 $405.00 2.25 175 $393.75 1.80 200 $360.00 1.35 225 $303.75 0.90 250 $225.00 0.45 275 $123.75 300 Suppose Nick and Rosa 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, Nick and Rosa agree to split production equally. Therefore, Nick's profit is $ and Rosa's profit is $ Suppose that Nick and Rosa 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, Nick says to himself, "Rosa 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 Nick implements his new plan, the price of water to per gallon. Given Rosa and Nick's production levels, Nick's profit becomes and Rosa's profit becomes Because Nick has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Rosa decides that she will also increase her production to 25 gallons more than the cartel amount. After Rosa increases her production, Nick's profit becomes $ Rosa's profit becomes $ and total profit (the sum of the profits of Nick and Rosa) is now $
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