Suppose that James and Amber 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, James says to himself, "Amber 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 James implements his new plan, the price of water James's profit becomes s After Amber increases her production, James's profit becomes s of the profits of James and Amber) is now s and Amber's profit becomes s Because James has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Amber decides that she will also increase her production to 35 gallons more than the cartel amount. True False to s per gallon. Given Amber and James's production levels, This behavior is an example of True or False: Based on the fact that both James and Amber increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. Amber's profit becomes s and total profit (the sum Note that James and Amber started by behaving cooperatively. However, once James decided to cheat, Amber decided to cheat as well. In other words, Amber's output decisions are based on James's actions.
Suppose that James and Amber 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, James says to himself, "Amber 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 James implements his new plan, the price of water James's profit becomes s After Amber increases her production, James's profit becomes s of the profits of James and Amber) is now s and Amber's profit becomes s Because James has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Amber decides that she will also increase her production to 35 gallons more than the cartel amount. True False to s per gallon. Given Amber and James's production levels, This behavior is an example of True or False: Based on the fact that both James and Amber increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. Amber's profit becomes s and total profit (the sum Note that James and Amber started by behaving cooperatively. However, once James decided to cheat, Amber decided to cheat as well. In other words, Amber's output decisions are based on James's actions.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:Suppose that James and Amber 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, James says to himself, "Amber 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 James implements his new plan, the price of water
James's profit becomes s
After Amber increases her production, James's profit becomes s
of the profits of James and Amber) is now s
and Amber's profit becomes s
Because James has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Amber decides
that she will also increase her production to 35 gallons more than the cartel amount.
True
False
to s
per gallon. Given Amber and James's production levels,
This behavior is an example of
True or False: Based on the fact that both James and Amber increased production from the initial cartel quantity, you know that the output effect was
larger than the price effect at that quantity.
, Amber's profit becomes s
and total profit (the sum
Note that James and Amber started by behaving cooperatively. However, once James decided to cheat, Amber decided to cheat as well. In other
words, Amber's output decisions are based on James's actions.
Transcribed Image Text:3. Breakdown of a cartel agreement
Consider a town in which only two residents, James and Amber, own wells that produce water safe for drinking. James and Amber 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)
4.80
4.40
4.00
3,60
3.20
2.80
2.40
2.00
1.60
1.20
0.80
0.40
0
Quantity Demanded
(Gallons of water)
0
35
70
105
140
175
210
245
280
315
350
385
420
Total Revenue
(Dollars)
0
$154.00
$280.00
$378.00
$448.00
$490.00
$504.00
$490.00
$448.00
$378.00
$280.00
$154.00
0
Suppose James and Amber form a cartel and behave as a monopolist. The profit-maximizing price is
per gallon, and the total output
gallons. As part of their cartel agreement, James and Amber agree to split production equally. Therefore, James's profit is s
is
and Amber's profit is s
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