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Chrome- MndTap-Cengage Leaning O ng.cengage.com/static/mb/ul/index htm2nbld-608956&nbNodeld-223075403;&deploymentld-56736679955336941068305888elS8N-978133709657; 5% MIN DTAP Homework (Ch 17) 2. Breakdewn of a cartel agreement Consicer a town in which only two es much water as they want at no cost. For them, total revenue equals proftt. The following tabie shows the town's demand scheduse for w residents, carey and Eleen, own wens tat produce water safe for onnong. acy and Eileen pump ser ater Quantity Demanded (Dellars per gallon) (Gallons of water) Total Revenue (Dolars) 99.00 $180.00 $243.00 $288.00 $315.00 324.00 2.40 288.00 $99.00 6 8 9Explanation / Answer
a. Profit maximising level of output is at a point where the marginal revenue equals the marginal cost.
Since MC = 0, so the nearest value where MR = MC is at 180 units of output.
The corresponding price is $1.80, this is the profit maximising level of price.
b. Total output is 180 units.
c. Profit of each = total revenue earned.
Total revneue @ $180 = $324.
So profit earned by each is = 324/2 or $162.
d. Since each produces 90 units of wtaer, so producing 30 gallons more by Clancy implies he would be producing a total of 90 + 30 = 120 units.
Thus, total units produced by both is 120 + 90 or 210 units.
Since more is supplied to the market, so the price of water in the market would FALL.
e. At this quantity the price charged is $1.50 (from 1.8 to 1.5).
f. Clancy's profit = 120 * 1.5 or $180.
Eileen's profit = 90*1.5 or $135.
g. Eileen's increased production makes the total output in the market as 210 + 30 or 240 units.
The price charged at this level is $1.20.
Clancy's profit = 120 * 1.2 or $144
Eileen's profit = 120
h. False.
In this case the price effect is more stronger than the output effect because raising the output quantity reduced the price and the total profit of each firm. In output being stronger, increasing output increases profit.
i. Tit for tat strategy.
Initial both formed a cartel, then starting with Clancy's action, Eileen retaliated. Clear example of tit for tat strategy.
P Q TR MR 3.6 0 0 nil 3.3 30 99 3.3 3 60 180 2.7 2.7 90 243 2.1 2.4 120 288 1.5 2.1 150 315 0.9 1.8 180 324 0.3 1.5 210 315 -0.3 1.2 240 288 -0.9 0.9 270 243 -1.5 0.6 300 180 -2.1 0.3 330 99 -2.7 0 360 0 -3.3Related Questions
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