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3. Breakdown of a cartel agreement Consider a town in which only two residents, Gregor and Haidy, own wells that produce water safe for drinking. Gregor and Haidy 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. is Price (Dollars per gallon) 5.40 4.95 4.50 4.05 3.60 3.15 2.70 2.25 1.80 1.35 $ 0.90 0.45 0 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 I 450 495 540 Total Revenue (Dollars) 0 Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is $ gallons. As part of their cartel agreement, Gregor and Haidy agree to split production equally. Therefore, Gregor's profit is and Haidy's profit is $ $222.75 $405.00 $546.75 $648.00 $708.75 $729.00 $708.75 $648.00 $546.75 $405.00 $222.75 0 After Gregor implements his new plan, the price of water Gregor's profit becomes $ Suppose that Gregor and Haidy 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, Gregor says to himself, "Haidy 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." per gallon, and the total output and Haidy's profit becomes $ to $ per gallon. Given Haidy and Gregor's production levels,

3. Breakdown of a cartel agreement Consider a town in which only two residents, Gregor and Haidy, own wells that produce water safe for drinking. Gregor and Haidy 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. is Price (Dollars per gallon) 5.40 4.95 4.50 4.05 3.60 3.15 2.70 2.25 1.80 1.35 $ 0.90 0.45 0 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 I 450 495 540 Total Revenue (Dollars) 0 Suppose Gregor and Haidy form a cartel and behave as a monopolist. The profit-maximizing price is $ gallons. As part of their cartel agreement, Gregor and Haidy agree to split production equally. Therefore, Gregor's profit is and Haidy's profit is $ $222.75 $405.00 $546.75 $648.00 $708.75 $729.00 $708.75 $648.00 $546.75 $405.00 $222.75 0 After Gregor implements his new plan, the price of water Gregor's profit becomes $ Suppose that Gregor and Haidy 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, Gregor says to himself, "Haidy 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." per gallon, and the total output and Haidy's profit becomes $ to $ per gallon. Given Haidy and Gregor's production levels,

Principles of Microeconomics
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter15: Monopoly
Section: Chapter Questions
Problem 7PA
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3. Breakdown of a cartel agreement Consider a town in which only two residents, Gregor and Haidy, own wells that produce water safe for drinking. Gregor and Haidy 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. is Price (Dollars per gallon) 5.40 4.95 4.50 4.05 3.60 3.15 $ 2.70 2.25 1.80 1.35 0.90 0.45 0 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 450 495 540 I Total Revenue Suppose Gregor and Haidy 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, Gregor and Haidy agree to split production equally. Therefore, Gregor's profit is and Haidy's profit is $ (Dollars) 0 $222.75 $405.00 $546.75 $648.00 $708.75 $729.00 $708.75 $648.00 $546.75 $405.00 $222.75 0 After Gregor implements his new plan, the price of water Gregor's profit becomes $ Suppose that Gregor and Haidy 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, Gregor says to himself, "Haidy 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." and Haidy's profit becomes $ to $ per gallon. Given Haidy and Gregor's production levels,
Transcribed Image Text:3. Breakdown of a cartel agreement Consider a town in which only two residents, Gregor and Haidy, own wells that produce water safe for drinking. Gregor and Haidy 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. is Price (Dollars per gallon) 5.40 4.95 4.50 4.05 3.60 3.15 $ 2.70 2.25 1.80 1.35 0.90 0.45 0 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 450 495 540 I Total Revenue Suppose Gregor and Haidy 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, Gregor and Haidy agree to split production equally. Therefore, Gregor's profit is and Haidy's profit is $ (Dollars) 0 $222.75 $405.00 $546.75 $648.00 $708.75 $729.00 $708.75 $648.00 $546.75 $405.00 $222.75 0 After Gregor implements his new plan, the price of water Gregor's profit becomes $ Suppose that Gregor and Haidy 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, Gregor says to himself, "Haidy 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." and Haidy's profit becomes $ to $ per gallon. Given Haidy and Gregor's production levels,
After Gregor implements his new plan, the price of water Gregor's profit becomes $ and Haidy's profit becomes $ After Haidy increases her production, Gregor's profit becomes $ the profits of Gregor and Haidy) is now $ Because Gregor has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Haidy decides that she will also increase her production to 45 gallons more than the cartel amount. True to $ False per gallon. Given Haidy and Gregor's production levels, I Haidy's profit becomes $ True or False: Based on the fact that both Gregor and Haidy increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. and total profit (the sum of Gregor and Haidy 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 Gregor'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 Gregor nor Haidy 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:After Gregor implements his new plan, the price of water Gregor's profit becomes $ and Haidy's profit becomes $ After Haidy increases her production, Gregor's profit becomes $ the profits of Gregor and Haidy) is now $ Because Gregor has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Haidy decides that she will also increase her production to 45 gallons more than the cartel amount. True to $ False per gallon. Given Haidy and Gregor's production levels, I Haidy's profit becomes $ True or False: Based on the fact that both Gregor and Haidy increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. and total profit (the sum of Gregor and Haidy 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 Gregor'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 Gregor nor Haidy has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of
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