Consider a town in which only two residents, Alex and Becky, own wells that produce water safe for drinking. Alex and Becky 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 DemandedTotal Revenue(Dollars per gallon)(Gallons of water)(Dollars)3.603.3035$115.503.0070$210.002.70105$283.502.40140$336.002.10175$367.501.80210$378.001.50245$367.501.20280$336.000.90315$283.500.60350$210.000.30385$115.50420Suppose Alex and Becky form a cartel and behave as a monopolist. The profit-maximizing price is $per gallon, and the total output isgallons. As part of their cartel agreement, Alex and Becky agree to split production equally.. Therefore, Alex's profit is $and Becky's profit is $Suppose that Alex and Becky 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, Alex says to himself, "Becky 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."After Alex implements his new plan, the price of water increasesto $per gallon. Given Becky and Alex's production levels,Alex's profit becomes $and Becky's profit becomes $Because Alex has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Becky decides thatshe will also increase her production to 35 gallons more than the cartel amount.After Becky increases her production, Alex's profit becomes $|, Becky's profit becomes $, and total profit (the sumof the profits of Alex and Becky) is now $ True or False: Based on the fact that both Alex and Becky increased production from the initial cartel quantity, you know that the output effect waslarger than the price effect at that quantity.O TrueO FalseAlex and Becky have each cheated on their cartel agreement and increased production by 35 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 Alex'sprofit when he produces 70 gallons more than the cartel amount compared to his profit when he produces 35 gallons more than the cartel amount.)Neither Alex nor Becky has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an exampleof

[a] Profit is calculated by taking the difference between total revenue and total cost. Profit = TR…

Consider a town in which only two residents, Alex and Becky, own wells that produce water safe for drinking. Alex and Becky 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 Quantity Demanded Total Revenue (Dollars per gallon) (Gallons of water) (Dollars) 3.60 3.30 35 $115.50 3.00 70 $210.00 2.70 105 $283.50 2.40 140 $336.00 2.10 175 $367.50 1.80 210 $378.00 1.50 245 $367,50 1.20 280 $336.00 0.90 315 $283.50 0.60 350 $210.00 0.30 385 $115.50 420 Suppose Alex and Becky 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, Alex and Becky agree to split production equally. Therefore, Alex's profit is $ and Becky's profit is $ Suppose that Alex and Becky 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, Alex says to himself, "Becky 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 Alex implements his new plan, the price of water increases v to $ per gallon. Given Becky and Alex's production levels, Alex's profit becomes $ and Becky's profit becomes $ Because Alex has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Becky decides that she will also increase her production to 35 gallons more than the cartel amount. |, Becky's profit becomes $ , and total profit (the sum After Becky increases her production, Alex's profit becomes $ of the profits of Alex and Becky) is now $

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 9E