Consider a town in which only two residents, Sean and Yvette, own wells that produce water safe for drinking. Sean and Yvette 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 0 0 4.95 40 $198.00 4.50 80 $360.00 4.05 120 $486.00 3.60 160 $576.00 3.15 200 $630.00 2.70 240 $648.00 2.25 280 $630.00 1.80 320 $576.00 1.35 360 $486.00 0.90 400 $360.00 0.45 440 $198.00 0 480 0 Suppose Sean and Yvette 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, Sean and Yvette agree to split production equally. Therefore, Sean's profit is $ __________ , and Yvette's profit is __________ . Suppose that Sean and Yvette 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, Sean says to himself, "Yvette and I aren't the best of friends anyway. If I increase my production to 40 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Sean implements his new plan, the price of water (decreases / increases) to $ __________ per gallon. Given Yvette and Sean's production levels, Sean's profit becomes $ __________ and Yvette's profit becomes $ __________ . Because Sean has deviated from the cartel agreement and increased his output of water to 40 gallons more than the cartel amount, Yvette decides that she will also increase her production to 40 gallons more than the cartel amount. After Yvette increases her production, Sean's profit becomes $ __________ , Yvette's profit becomes $ __________ , and total profit (the sum of the profits of Sean and Yvette) is now $ __________ .

Consider a town in which only two residents, Sean and Yvette, own wells that produce water safe for drinking. Sean and Yvette 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 0 0 4.95 40 $198.00 4.50 80 $360.00 4.05 120 $486.00 3.60 160 $576.00 3.15 200 $630.00 2.70 240 $648.00 2.25 280 $630.00 1.80 320 $576.00 1.35 360 $486.00 0.90 400 $360.00 0.45 440 $198.00 0 480 0 Suppose Sean and Yvette 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, Sean and Yvette agree to split production equally. Therefore, Sean's profit is $ , and Yvette's profit is . Suppose that Sean and Yvette 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, Sean says to himself, "Yvette and I aren't the best of friends anyway. If I increase my production to 40 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Sean implements his new plan, the price of water (decreases / increases) to $ per gallon. Given Yvette and Sean's production levels, Sean's profit becomes $ and Yvette's profit becomes $ . Because Sean has deviated from the cartel agreement and increased his output of water to 40 gallons more than the cartel amount, Yvette decides that she will also increase her production to 40 gallons more than the cartel amount. After Yvette increases her production, Sean's profit becomes $ , Yvette's profit becomes $ , and total profit (the sum of the profits of Sean and Yvette) is now $ .

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Breakdown of a cartel agreement

Price	Quantity Demanded	Total Revenue
(Dollars per gallon)	(Gallons of water)	(Dollars)
5.40	0	0
4.95	40	$198.00
4.50	80	$360.00
4.05	120	$486.00
3.60	160	$576.00
3.15	200	$630.00
2.70	240	$648.00
2.25	280	$630.00
1.80	320	$576.00
1.35	360	$486.00
0.90	400	$360.00
0.45	440	$198.00
0	480	0

Suppose Sean and Yvette 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, Sean and Yvette agree to split production equally. Therefore, Sean's profit is

$ __________ , and Yvette's profit is __________ .

Suppose that Sean and Yvette 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, Sean says to himself, "Yvette and I aren't the best of friends anyway. If I increase my production to 40 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Sean implements his new plan, the price of water (decreases / increases) to $ __________ per gallon. Given Yvette and Sean's production levels, Sean's profit becomes $ __________ and Yvette's profit becomes $ __________ .

Because Sean has deviated from the cartel agreement and increased his output of water to 40 gallons more than the cartel amount, Yvette decides that she will also increase her production to 40 gallons more than the cartel amount.

After Yvette increases her production, Sean's profit becomes $ __________ , Yvette's profit becomes $ __________ , and total profit (the sum of the profits of Sean and Yvette) is now $ __________ .

True or False: Based on the fact that both Sean and Yvette increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity.

True

False

Sean and Yvette have each cheated on their cartel agreement and increased production by 40 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 Sean's profit when he produces 80 gallons more than the cartel amount compared to his profit when he produces 40 gallons more than the cartel amount.)

Neither Sean nor Yvette has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of (a Nash equilibrium / resale price maintenance / predatory pricing / tying).

Definition Video Definition Point where the demand and supply curves intersect. At the equilibrium price the quantity supplied of a good is equal to the quantity demanded. When the market is not in equilibrium, market surplus or market shortage occurs. The region that is above the price equilibrium indicates market surplus and the region below the price equilibrium indicates market shortage. Video

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