2. Breakdown of a cartel agreement Consider a town in which only two residents,
ID: 1110680 • Letter: 2
Question
2. 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) 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 45 90 135 180 225 270 315 360 405 450 495 540 $247.50 $450.00 $607.50 $720.00 $787.50 $810.00 $787.50 $720.00 $607.50 $450.00 $247.50 Suppose Clancy and Eileen form a cartel and behave as a monopolist. The profit-maximizing price is$ is per galon, and the total output gallons. As part of their cartel agreement, Clancy and Eileen agree to split production equally. Therefore, Clancy's profit is and Eileen's profit is $ Suppose that Clancy and Eileen 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, Clancy says to himself, "Eileen 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 eventhough her profit goes down. I will do that starting tomorrow." After Clancy implements his new plan, the price of water toS per gallon. Given Eileen and Clancy's production levels, Clancy's profit becomes and Eileen's profit becomes$ Because Clancy has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Eileen decides that she will also increase her production to 45 gallons more than the cartel amount. After Eileen increases her production, Clancy's profit becomes s , Eileen's profit becomes , and total profit (the sum of the profits of Clancy and Eileen) is nowExplanation / Answer
Answer to blank 1: $3
Answer to blank 2: 270
Answer to blank 3: $405 (i.e. 810 / 2 = $405)
Answer to blank 4: $405 (i.e. 810 / 2 = $405)
Answer to blank 5: decreases
Answer to blank 6: $2.50
Explanation:
Now the production by Clancy = 135 + 45 = 180 and production by Eileen = 135. So, total production = 180 + 135 = 315.
Answer to blank 7: $450 (i.e. $2.50 * 180 = $450)
Answer to blank 8: $337.5 (i.e. $2.50 * 135 = $337.5)
Answer to blank 9: $360
Answer to blank 10: $360
Answer to blank 11: $720
Explanation:
Now the production by Clancy = 135 + 45 = 180 and production by Eileen = 135 + 45 = 180. So, total production = 180 + 180 = 360.
Ans: True
Explanation:
Output effect means if P > MC, increasing output will lead to increase in profit. Price effect means increasing output increases market quantity, which reduces price and reduces profit on all units sold. If output effect is greater than price effect, firms will increase production. And, if price effect is output effect, firms will reduce production.
Answer to the blank: Nash equilibrium
Explanation:
A Nash equilibrium is a situation in which each firm chooses the best strategy to maximize his or her parofit, given the actions of other firms. Each firm sees no gain from changing his or her strategy if the actions of the other parties remain fixed.
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