7 Consider a town in which only two residents, Kevin and Maria, own wells that produce water safe for drinking. Kevin and Maria can pump and sell asmuch water 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(Gallons of water)Total Revenue(Dollars)(Dollars per gallon)3.60003.3035$115.503.0070$210.002.70105$283.502.40140$336.002.1017567.501.80210$378.001.50245$367.501.20280$336.000.90315$283.500.60350$210.000.30385$115.5004200Suppose Kevin and Maria form a cartel and behave as a monopolist. The profit-maximizing price is $output isper gallon, and the totalgallons. As part of their cartel agreement, Kevin and Maria agree to split production equally. Therefore, Kevin's profitand Maria's profit is $is $Suppose that Kevin and Maria have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopolyquantity. Then one night before going to sleep, Kevin says to himself, "Maria and I aren't the best of friends anyway. If I increase my production to 35gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." to $per gallon. Given Maria and Kevin's production levels,After Kevin implements his new plan, the price of waterKevin's profit becomes $and Maria's profit becomesBecause Kevin has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Maria decidesthat she will also increase her production to 35 gallons more than the cartel amount.After Maria increases her production, Kevin's profit becomes $Maria's profit becomes $, and total profit (thesum of the profits of Kevin and Maria) is now $True or False: Based on the fact that both Kevin and Maria increased production from the initial cartel quantity, you know that the output effect waslarger than the price effect at that quantity.TrueFalseKevin and Maria have each cheated on their cartel agreement and increased production by 35 gallons more than the cartel amount. However, theyboth realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, considerKevin's profit when he produces 70 gallons more than the cartel amount compared to his profit when he produces 35 gallons more than the cartelamount.)Neither Kevin nor Maria has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an exampleof

A monopoly is a firm who is the one merchant of its item, and where there are no nearby substitutes.…

140 $336.00 175 $367.50 210 $378.00 245 $367.50 280 $336.00 315 $283.50 350 $210.00 385 $115.50 0 420 el and behave as a monopolist. The profit-maximizing price is $ per gallon, and the total their cartel agreement, Kevin and Maria agree to split production equally. Therefore, Kevin's profit rofit is $ een successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly to sleep, Kevin says to himself, "Maria and I aren't the best of friends anyway. If I increase my production to 35 I can increase my profit even though her profit goes down. I will do that starting tomorrow."

140 $336.00 175 $367.50 210 $378.00 245 $367.50 280 $336.00 315 $283.50 350 $210.00 385 $115.50 0 420 el and behave as a monopolist. The profit-maximizing price is $ per gallon, and the total their cartel agreement, Kevin and Maria agree to split production equally. Therefore, Kevin's profit rofit is $ een successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly to sleep, Kevin says to himself, "Maria and I aren't the best of friends anyway. If I increase my production to 35 I can increase my profit even though her profit goes down. I will do that starting tomorrow."

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter3: Demand Analysis

Section: Chapter Questions

Problem 10E

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