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gallons. As part of their cartel agreement, Tim and Alyssa agree to split production equally. Therefore, Tim's profit is a's profit is $ ose that Tim and Alyssa have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly ity. Then one night before going to sleep, Tim says to himself, "Alyssa and I aren't the best of friends anyway. If I increase my production to 45 as more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." Tim implements his new plan, the price of water becomes and Alyssa's profit becomes to $ Alyssa increases her production, Tim's profit becomes ofits of Tim and Alyssa) is now [$ and per gallon. Given Alyssa and Tim's production levels, Tim's use Tim has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Alyssa decides that ill also increase her production to 45 gallons more than the cartel amount. Alyssa's profit becomes , and total profit (the sum of or False: Based on the fact that both Tim and Alyssa increased production from the initial cartel quantity, you know that the output effect was than the price effect at that quantity.

gallons. As part of their cartel agreement, Tim and Alyssa agree to split production equally. Therefore, Tim's profit is a's profit is $ ose that Tim and Alyssa have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly ity. Then one night before going to sleep, Tim says to himself, "Alyssa and I aren't the best of friends anyway. If I increase my production to 45 as more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." Tim implements his new plan, the price of water becomes and Alyssa's profit becomes to $ Alyssa increases her production, Tim's profit becomes ofits of Tim and Alyssa) is now [$ and per gallon. Given Alyssa and Tim's production levels, Tim's use Tim has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Alyssa decides that ill also increase her production to 45 gallons more than the cartel amount. Alyssa's profit becomes , and total profit (the sum of or False: Based on the fact that both Tim and Alyssa increased production from the initial cartel quantity, you know that the output effect was than the price effect at that quantity.

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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Suppose Tim and Alyssa form a cartel and behave as a monopolist. The profit-maximizing price is gallons. As part of their cartel agreement, Tim and Alyssa agree to split production equally. Therefore, Tim's profit is [ Alyssa's profit is $ Suppose that Tim and Alyssa 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, Tim says to himself, "Alyssa 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." After Tim implements his new plan, the price of water profit becomes $ and Alyssa's profit becomes $ After Alyssa increases her production, Tim's profit becomes $ the profits of Tim and Alyssa) is now True per gallon, and the total output is , and to Because Tim has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Alyssa decides that she will also increase her production to 45 gallons more than the cartel amount. False per gallon. Given Alyssa and Tim's production levels, Tim's Alyssa's profit becomes $ True or False: Based on the fact that both Tim and Alyssa 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 Tim and Alyssa 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 Tim'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 Tim nor Alyssa 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:Suppose Tim and Alyssa form a cartel and behave as a monopolist. The profit-maximizing price is gallons. As part of their cartel agreement, Tim and Alyssa agree to split production equally. Therefore, Tim's profit is [ Alyssa's profit is $ Suppose that Tim and Alyssa 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, Tim says to himself, "Alyssa 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." After Tim implements his new plan, the price of water profit becomes $ and Alyssa's profit becomes $ After Alyssa increases her production, Tim's profit becomes $ the profits of Tim and Alyssa) is now True per gallon, and the total output is , and to Because Tim has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Alyssa decides that she will also increase her production to 45 gallons more than the cartel amount. False per gallon. Given Alyssa and Tim's production levels, Tim's Alyssa's profit becomes $ True or False: Based on the fact that both Tim and Alyssa 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 Tim and Alyssa 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 Tim'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 Tim nor Alyssa has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of
3. Breakdown of a cartel agreement Consider a town in which only two residents, Tim and Alyssa, own wells that produce water safe for drinking. Tim and Alyssa 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) 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 450 495 540 Total Revenue (Dollars) 0 $247.50 $450.00 $607.50 $720.00 $787.50 $810.00 $787.50 $720.00 $607.50 $450.00 $247.50 0
Transcribed Image Text:3. Breakdown of a cartel agreement Consider a town in which only two residents, Tim and Alyssa, own wells that produce water safe for drinking. Tim and Alyssa 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) 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 Quantity Demanded (Gallons of water) 0 45 90 135 180 225 270 315 360 405 450 495 540 Total Revenue (Dollars) 0 $247.50 $450.00 $607.50 $720.00 $787.50 $810.00 $787.50 $720.00 $607.50 $450.00 $247.50 0
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