Suppose Sean and Yvette form a cartel and behave as a monopolist. The profit-maximizing price is s per gallon, and the total output gallons. As part of their cartel agreement, Sean and Yvette agree to split production equally. Therefore, Sean's profit is S is and Yvette's profit is s 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 45 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 to s per gallon. Given Yvette and Sean's production levels, Sean's profit becomes s and Yvette's profit becomes s Because Sean has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Yvette decides that she will also increase her production to 45 gallons more than the cartel amount. After Yvette increases her production, Sean's profit becomes s , Yvette's profit becomes S and total profit (the sum of the profits of Sean and Yvette) is now S Sean and Yvette have each cheated on their cartel agreement and increased production by 45 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 90 gallons more than the cartel amount compared to his profit when he produces 45 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
Suppose Sean and Yvette form a cartel and behave as a monopolist. The profit-maximizing price is s per gallon, and the total output gallons. As part of their cartel agreement, Sean and Yvette agree to split production equally. Therefore, Sean's profit is S is and Yvette's profit is s 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 45 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 to s per gallon. Given Yvette and Sean's production levels, Sean's profit becomes s and Yvette's profit becomes s Because Sean has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Yvette decides that she will also increase her production to 45 gallons more than the cartel amount. After Yvette increases her production, Sean's profit becomes s , Yvette's profit becomes S and total profit (the sum of the profits of Sean and Yvette) is now S Sean and Yvette have each cheated on their cartel agreement and increased production by 45 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 90 gallons more than the cartel amount compared to his profit when he produces 45 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
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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 s
and Yvette's profit is S
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 45
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
to $
per gallon. Given Yvette and Sean's production levels,
Sean's profit becomes s
and Yvette's profit becomes $
Because Sean has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Yvette decides
that she will also increase her production to 45 gallons more than the cartel amount.
After Yvette increases her production, Sean's profit becomes s
of the profits of Sean and Yvette) is now S
,Yvette's profit becomes
and total profit (the sum
Sean and Yvette have each cheated on their cartel agreement and increased production by 45 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 90 gallons more than the cartel amount compared to his profit when he produces 45 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
Transcribed Image Text:6. Breakdown of a cartel agreement
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)
6.00
5.50
45
248
5.00
90
450
4.50
135
608
4.00
180
720
3.50
225
788
3.00
270
810
2.50
315
788
2.00
360
720
1.50
405
608
1.00
450
450
0.50
495
248
540
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