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Consider a town in which only two residents, Sam and Teresa, own wells that produce water safe for drinking. Sam and Teresa 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) 3.60 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 $115.50 420 Suppose Sam and Teresa form a cartel and behave as a monopolist. The profit-maximizing price is $ | gallons. As part of their cartel agreement, Sam and Teresa agree to split production equally. Therefore, Sam's profit is $ and Teresa's profit is $ |per gallon, and the total output is

Consider a town in which only two residents, Sam and Teresa, own wells that produce water safe for drinking. Sam and Teresa 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) 3.60 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 $115.50 420 Suppose Sam and Teresa form a cartel and behave as a monopolist. The profit-maximizing price is $ | gallons. As part of their cartel agreement, Sam and Teresa agree to split production equally. Therefore, Sam's profit is $ and Teresa's profit is $ |per gallon, and the total output is

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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1. price of water to - decreases - increases 2. the behavior is an example of - a prisoner's dilemma -tying -a tit-for-tat strategy -a dominant strategy
Transcribed Image Text:1. price of water to - decreases - increases 2. the behavior is an example of - a prisoner's dilemma -tying -a tit-for-tat strategy -a dominant strategy
3. Breakdown of a cartel agreement Consider a town in which only two residents, Sam and Teresa, own wells that produce water safe for drinking. Sam and Teresa 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) 3.60 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 $115.50 420 Suppose Sam and Teresa 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, Sam and Teresa agree to split production equally. Therefore, Sam's profit is $ and Teresa's profit is $ Suppose that Sam and Teresa 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, Sam says to himself, "Teresa 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." per gallon. Given Teresa and Sam's production levels, After Sam implements his new plan, the price of water Sam's profit becomes $ ▼ to $ and Teresa's profit becomes $ Because Sam has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Teresa decides that she will also increase her production to 35 gallons more than the cartel amount. After Teresa increases her production, Sam's profit becomes $ of the profits of Sam and Teresa) is now $ Teresa's profit becomes $ |, and total profit (the sum True or False: Based on the fact that both Sam and Teresa 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 Note that Sam and Teresa started by behaving cooperatively. However, once Sam decided to cheat, Teresa decided to cheat as well. In other words, Teresa's output decisions are based on Sam's actions. This behavior is an example of
Transcribed Image Text:3. Breakdown of a cartel agreement Consider a town in which only two residents, Sam and Teresa, own wells that produce water safe for drinking. Sam and Teresa 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) 3.60 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 $115.50 420 Suppose Sam and Teresa 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, Sam and Teresa agree to split production equally. Therefore, Sam's profit is $ and Teresa's profit is $ Suppose that Sam and Teresa 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, Sam says to himself, "Teresa 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." per gallon. Given Teresa and Sam's production levels, After Sam implements his new plan, the price of water Sam's profit becomes $ ▼ to $ and Teresa's profit becomes $ Because Sam has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Teresa decides that she will also increase her production to 35 gallons more than the cartel amount. After Teresa increases her production, Sam's profit becomes $ of the profits of Sam and Teresa) is now $ Teresa's profit becomes $ |, and total profit (the sum True or False: Based on the fact that both Sam and Teresa 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 Note that Sam and Teresa started by behaving cooperatively. However, once Sam decided to cheat, Teresa decided to cheat as well. In other words, Teresa's output decisions are based on Sam's actions. This behavior is an example of
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