Consider a town in which only two residents, Raphael and Susan, own wells that produce water safe for drinking. Raphael and Susan 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) (Gallons of water) Quantity Demanded Total Revenue (Dollars) 3.60 3.30 35 $115.50 $210.00 $283.50 $336.00 $367.50 $378.00 $367.50 $336.00 $283.50 $210.00 $115.50 3.00 70 2.70 105 2.40 140 2.10 175 1.80 210 1.50 245 1.20 280 0.90 315 0.60 350 0.30 385 420 Suppose Raphael and Susan form a cartel and behave as a monopolist. The profit-maximizing price is s agreement, Raphael and Susan agree to split production equally. Therefore, Raphael's profit is per gallon, and the total output is |gallons. As part of their cartel |, and Susan's profit is s Suppose that Raphael and Susan 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, Raphael says to himself, "Susan 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 Raphael implements his new plan, the price of water | per gallon. Given Susan and Raphael's production levels, Raphael's profit becomes and Susan's profit becomes 3 Because Raphael has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Susan decides that she will also increase her production to 35 gallons more than the cartel amount. After Susan increases her production, Raphael's profit becomes 5 Susan's profit becomes S 1, and total profit (the sum of the profits of Raphael and Susan) is now
Consider a town in which only two residents, Raphael and Susan, own wells that produce water safe for drinking. Raphael and Susan 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) (Gallons of water) Quantity Demanded Total Revenue (Dollars) 3.60 3.30 35 $115.50 $210.00 $283.50 $336.00 $367.50 $378.00 $367.50 $336.00 $283.50 $210.00 $115.50 3.00 70 2.70 105 2.40 140 2.10 175 1.80 210 1.50 245 1.20 280 0.90 315 0.60 350 0.30 385 420 Suppose Raphael and Susan form a cartel and behave as a monopolist. The profit-maximizing price is s agreement, Raphael and Susan agree to split production equally. Therefore, Raphael's profit is per gallon, and the total output is |gallons. As part of their cartel |, and Susan's profit is s Suppose that Raphael and Susan 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, Raphael says to himself, "Susan 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 Raphael implements his new plan, the price of water | per gallon. Given Susan and Raphael's production levels, Raphael's profit becomes and Susan's profit becomes 3 Because Raphael has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Susan decides that she will also increase her production to 35 gallons more than the cartel amount. After Susan increases her production, Raphael's profit becomes 5 Susan's profit becomes S 1, and total profit (the sum of the profits of Raphael and Susan) is now
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:**Title: Understanding Monopolistic Behavior in a Small Market**
**Introduction:**
Consider a town where only two residents, Raphael and Susan, own wells that produce clean, drinkable water. They can pump and sell as much water as they wish at no cost. For them, total revenue equals profit. The table below illustrates the town's demand schedule for water.
**Demand Schedule for Water:**
| Price (Dollars per gallon) | Quantity Demanded (Gallons of water) | Total Revenue (Dollars) |
|----------------------------|--------------------------------------|-------------------------|
| 3.60 | 0 | 0 |
| 3.30 | 35 | 115.50 |
| 3.00 | 70 | 210.00 |
| 2.70 | 105 | 283.50 |
| 2.40 | 140 | 336.00 |
| 2.10 | 175 | 367.50 |
| 1.80 | 210 | 378.00 |
| 1.50 | 245 | 367.50 |
| 1.20 | 280 | 336.00 |
| 0.90 | 315 | 283.50 |
| 0.60 | 350 | 210.00 |
| 0.30 | 385 | 115.50 |
| 0 | 420 | 0 |
**Monopoly Scenario:**
Raphael and Susan decide to form a cartel, behaving as a single monopolist. The profit-maximizing price is determined at a certain dollar amount per gallon, and the optimal quantity of water sold is identified as a specific number of gallons. According to their agreement, profits are split equally, giving each a predetermined share in dollars.
**Deviation from the Cartel:**
Despite operating efficiently as a cartel, Raphael considers deviating from their agreement by increasing his output beyond the cartel amount, thereby increasing his profit even if the price drops. Susan, upon noticing the increase, also decides to adjust her production to match Raphael's new output.
**Post-Deviation Impact:**
With changes in production levels, both the price of water and the profits for Raphael and Susan are affected. The new profits for both parties
Transcribed Image Text:**Question:**
True or False: Based on the fact that both Raphael and Susan increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity.
- ○ True
- ○ False
**Explanation:**
Note that Raphael and Susan started by behaving cooperatively. However, once Raphael decided to cheat, Susan decided to cheat as well. In other words, Susan's output decisions are based on Raphael's actions.
This behavior is an example of ___________________.
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