Consider a town in which only two residents, Raphael and Susan, own wells that produce watersafe for drinking. Raphael and Susan 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 forwater.Price(Dollars per gallon)3.60Quantity Demanded Total Revenue(Gallons of water)(Dollars)3.3035$115.50$210.00$283.50$336.003.00702.701052.401402.10175$367.501.80210$378.001.50245$367.501.20280$336.000.90315$283.500.60350$210.000.30385$115.50420Suppose Raphael and Susan form a cartel and behave as a monopolist. The profit-maximizing priceis sagreement, Raphael and Susan agree to split production equally. Therefore, Raphael's profit isper gallon, and the total output isgallons. As part of their carteland Susan's profit is sSuppose that Raphael and Susan have been successfully operating as a cartel. They each chargethe monopoly price and sell half of the monopoly quantity. Then one night before going to sleep,Raphael says to himself, "Susan and I aren't the best of friends anyway. If I increase myproduction to 35 gallons more than the cartel amount, Iprofit goes down. I will do that starting tomorrow."increase my profit even though herAfter Raphael implements his new plan, the price of watertoper gallon. Given Susan and Raphael's production levels, Raphael's profitbecomes sand Susan's profit becomes sBecause Raphael has deviated from the cartel agreement and increased his output of water to 35gallons more than the cartel amount, Susan decides that she will also increase her production to35 gallons more than the cartel amount.After Susan increases her production, Raphael's profit becomes $, Susan's profitbecomes s, and total profit (the sum of the profits of Raphael and Susan) is now True or False: Based on the fact that both Raphael and Susan increased production from the initialcartel quantity, you know that the output effect was smaller than the price effect at that quantity.Trueo FalseNote that Raphael and Susan started by behaving cooperatively. However, once Raphael decided tocheat, Susan decided to cheat as well. In other words, Susan's output decisions are based onRaphael's actions.This behavior is an example of

A monopoly can be defined as a market structure where only one seller sells goods in the market.…

Consider a town in which only two residents, Raphael and Susan, own wells that produce water safe for drinking. Raphael and Susan 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) (Gallons of water) Quantity Demanded Total Revenue (Dollars) 3.60 3.30 35 $115.50 $210.00 $283.50 $336.00 $367.50 $378.00 $367.50 $336.00 $283.50 $210.00 $115.50 3.00 70 2.70 105 2.40 140 2.10 175 1.80 210 1.50 245 1.20 280 0.90 315 0.60 350 0.30 385 420 Suppose Raphael and Susan form a cartel and behave as a monopolist. The profit-maximizing price is s agreement, Raphael and Susan agree to split production equally. Therefore, Raphael's profit is per gallon, and the total output is |gallons. As part of their cartel |, and Susan's profit is s Suppose that Raphael and Susan 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, Raphael says to himself, "Susan 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 Raphael implements his new plan, the price of water | per gallon. Given Susan and Raphael's production levels, Raphael's profit becomes and Susan's profit becomes 3 Because Raphael has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Susan decides that she will also increase her production to 35 gallons more than the cartel amount. After Susan increases her production, Raphael's profit becomes 5 Susan's profit becomes S 1, and total profit (the sum of the profits of Raphael and Susan) is now

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter6: Simple Pricing

Section: Chapter Questions

Problem 9MC