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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
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
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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