3. Breakdown of a cartel agreement Consider a town in which only two residents,

Question

3. Breakdown of a cartel agreement Consider a town in which only two residents, Clancy and Eileen, own wells that produce water safe for drinking-Clancy and Eileen 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. Quantity Demanded (Gallons of water) Price Total Revenue (Dollars per gallon) (Dollars) 3.60 3.30 3.00 2.70 2.40 2.10 1.80 1.50 1.20 0.90 35 70 105 140 175 210 245 280 315 350 385 420 $115.50 $210.00 $283.50 $336.00 367.50 $378.00 $367.50 336.00 $283.50 $210.00 $115.50 0.30 Suppose Clancy and Elleen form a cartel and behave as a monopolist. The profit-maximizing price is s output is per gallon, and the total gallons. As part of their cartel agreement, Clancy and Elileen agree to split production equally. Therefore, Clancy's profit is , and Eileen's profit iss Suppose that Clancy and Eileen have been s ly operating as a cartel. They each charge the monopoly price and sell half of the

Explanation / Answer

1) $ 1.80 is the optimal because because profit is maximized at this price

2) Total output = 210 units

3) Clancy's profit = Total profit / 2 = 378/2 = $ 189

4) Eileen's profit = 378/2 = $ 189

5) Decreases to $ 1.50

6) Clancy's profit = (105 + 35) x $ 1.50 = $ 210

7) Eileen's profit = 105 x 1.50 = $ 157.5

8) Clancy's profit = 140 x 1.20 = $ 168

9) Eileen's profit = 140 x 1.20 = $ 168

10) Total profit = 168 + 168 = $ 336

11) False

12) a Nash Equilibrium

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