3. Breakdown of a cartel agreementConsider a town in which only two residents, Van and Amy, own wells that produce water safe for drinking. Van and Amy can pump and sell as muchwater as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water.PriceQuantity Demanded Total Revenue(Dollars per gallon)(Gallons of water)(Dollars)6.005.5045$247.505.0090$450.004.50135$607.504.00180$720.003.50225$787.503.00270$810.002.50315$787.502.00360$720.001.50405$607.501.00450$450.000.50495$247.50540Suppose Van and Amy form a cartel and behave as a monopolist. The profit-maximizing price is Sper gallon, and the total output isgallons. As part of their cartel agreement, Van and Amy agree to split production equally. Therefore, Van's profit is sandAmy's profit is $Suppose that Van and Amy 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, Van says to himself, "Amy and I aren't the best of friends anyway. If I increase my production to 45 gallonsmore than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."After Van implements his new plan, the price of waterv to $per gallon. Given Amy and Van's production levels, Van'sprofit becomes Sand Amy's profit becomes s Because Van has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Amy decides thatshe will also increase her production to 45 gallons more than the cartel amount.After Amy increases her production, Van's profit becomes $, Amy's profit becomes $|, and total profit (the sum ofthe profits of Van and Amy) is now $True or False: Based on the fact that both Van and Amy increased production from the initial cartel quantity, you know that the output effect waslarger than the price effect at that quantity.O TrueO FalseVan and Amy have each cheated on their cartel agreement and increased production by 45 gallons more than the cartel amount. However, they bothrealize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Van'sprofit 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 Van nor Amy has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of

1 Blank - 3.00 2 Blank - 270 3 Blank - 405 (810/2) 4 Blank - 405 (810/2) 5 Blank - decreases 6 Blank…

Answered: ter Amy increases her production, Van's…

ter Amy increases her production, Van's profit becomes S e profits of Van and Amy) is now s Amy's profit becomes s and total pro

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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