Choices for last blank: a dominant strategy a prisoners dilemma tying a tit-for-

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                                   Choices for last blank: a dominant strategy

                                                                       a prisoners dilemma

                                                                       tying

                                                                       a tit-for-tat strategy

Please answer all the provided blanks in the figures shown above.

Attempts Average: /5 3. Breakdown of a cartel agreement Consider a town in which only two residents, Paolo and Sharon, own wells that produce water safe for drinking. Paolo and Sharon 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 0.60 0.30 0 0 $115.50 $210.00 $283.50 $336.00 $367.50 $378.00 $367.50 $336.00 $283.50 $210.00 $115.50 0 0 35 105 140 175 210 245 280 315 350 385 420 Suppose Paolo and Sharon form a cartel and behave as a monopolist. The profit-maximizing price is$ per gallon, and the total output is allons. As part of their cartel agreement, Paolo and Sharon agree to split production equally. Therefore, Paolo's profit

Explanation / Answer

Here as TC=0 so Profit = Revenue

As per the table Maximum revenue is when P=$1.80 per gallon and total output is 210 gallons with total revenue $378. As it is equally devided between them so Paulo earns $189 and Sharon earns $189.

As total ouput is now 245 gallons (Paulo's share is 140 gallons and Sharon share is 105 gallons) so price will be $1.50. Now Paulo's new profit = 1.5*140=$210 while Sharons new profit i= 1.5*105= $157.5

Now in this new scenario total ouput is 280 gallons (Paulo's share is 140 gallons and Sharon share is 140 gallons) so price will be $1.20. Now Paulo's new profit = 1.2*140=$168 while Sharons new profit i= 1.2*140= $168 with total profit of $336.

S it is true that output effect is larger than price effect at that output in this case

Tis is an example of tit for tat strategy

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