Suppose that Bob and Cho have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. hen one night before going to sleep, Bob says to himself, "Cho and I aren't the best of friends anyway. If I increase my production to 35 gallons more han the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." fter Bob implements his new plan, the price of water rofit becomes $ increases/decreases and Cho's profit becomes $ fter Cho increases her production, Bob's profit becomes $ he profits of Bob and Cho) is now $ True ecause Bob has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Cho decides that she vill also increase her production to 35 gallons more than the cartel amount. False to $ per gallon. Given Cho and Bob's production levels, Bob's , Cho's profit becomes $ rue or False: Based on the fact that both Bob and Cho increased production from the initial cartel quantity, you know that the output effect was larger han the price effect at that quantity. , and total profit (the sum of lote that Bob and Cho started by behaving cooperatively. However, once Bob decided to cheat, Cho decided to cheat as well. In other words, Cho's utput decisions are based on Bob's actions.
Suppose that Bob and Cho have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. hen one night before going to sleep, Bob says to himself, "Cho and I aren't the best of friends anyway. If I increase my production to 35 gallons more han the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." fter Bob implements his new plan, the price of water rofit becomes $ increases/decreases and Cho's profit becomes $ fter Cho increases her production, Bob's profit becomes $ he profits of Bob and Cho) is now $ True ecause Bob has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Cho decides that she vill also increase her production to 35 gallons more than the cartel amount. False to $ per gallon. Given Cho and Bob's production levels, Bob's , Cho's profit becomes $ rue or False: Based on the fact that both Bob and Cho increased production from the initial cartel quantity, you know that the output effect was larger han the price effect at that quantity. , and total profit (the sum of lote that Bob and Cho started by behaving cooperatively. However, once Bob decided to cheat, Cho decided to cheat as well. In other words, Cho's utput decisions are based on Bob's actions.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that Bob and Cho 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, Bob says to himself, "Cho 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 Bob implements his new plan, the price of water
profit becomes $
After Cho increases her production, Bob's profit becomes $
the profits of Bob and Cho) is now $
Ⓒ True
increases/decreases
and Cho's profit becomes $
Because Bob has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Cho decides that she
will also increase her production to 35 gallons more than the cartel amount.
False
This behavior is an example of
to
per gallon. Given Cho and Bob's production levels, Bob's
True or False: Based on the fact that both Bob and Cho increased production from the initial cartel quantity, you know that the output effect was larger
than the price effect at that quantity.
fill in blank
Cho's profit becomes $
, and total profit (the sum of
Note that Bob and Cho started by behaving cooperatively. However, once Bob decided to cheat, Cho decided to cheat as well. In other words, Cho's
output decisions are based on Bob's actions.
Transcribed Image Text:3. Breakdown of a cartel agreement
Consider a town in which only two residents, Bob and Cho, own wells that produce water safe for drinking. Bob and Cho 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)
3.60
3.30
3.00
2.70
2.40
2.10
1.80
1.50
1.20
0.90
0.60
0.30
0
Quantity Demanded
(Gallons of water)
0
35
70
105
140
175
210
245
280
315
350
385
420
Total Revenue
(Dollars)
0
$115.50
$210.00
$283.50
$336.00
$367.50
$378.00
$367.50
$336.00
$283.50
$210.00
$115.50
0
Suppose Bob and Cho 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, Bob and Cho agree to split production equally. Therefore, Bob's profit is $
Cho's profit is $
and
I
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