...produce water safe for.....? Consider a town in which only two residents, Kevin and Bette, own wells that produce water safe for drinking. Kevin and Bette can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The table below shows the town’s demand schedule for water.
Price per gallon Gallons demanded Total revenue (= total profit)
$6.00 0 $0
$5.50 100 $550
$5.00 200 $1,000
$4.50 300 $1,350
$4.00 400 $1,600
$3.50 500 $1,750
$3.00 600 $1,800
$2.50 700 $1,750
$2.00 800 $1,600
$1.50 900 $1,350
$1.00 1,000 $1,000
$0.50 1,100 $550
$0 1,200 $0
Suppose Kevin and Bette form a cartel and behave as a monopolist. Now, the profit-maximizing price is ________________________per gallon, and total output is __________gallons. As part of their cartel agreement, Kevin and Bette agree to split production equally. Therefore, Kevin’s profit is _____________, and Bette’s profit is __________.
Suppose that Kevin and Bette 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, Kevin says to himself, “Bette and I aren’t the best of friends anyway. If I increase my production to 100 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow.”
After Kevin implements his new plan, the price of water __________
a) increases
b) decreases
to ________ per gallon. Given Bette and Kevin’s production levels, Kevin’s profit becomes __________, Bette’s profit becomes ____________, and total profit (the sum of the profits of Kevin and Bette) is now ___________.
Because Kevin has deviated from the cartel agreement and increased his output of water to 100 gallons more than the cartel amount.
After Bette increases her production, Kevin’s profit becomes ______________ and Bette’s profit becomes ________________.
Price per gallon Gallons demanded Total revenue (= total profit)
$6.00 0 $0
$5.50 100 $550
$5.00 200 $1,000
$4.50 300 $1,350
$4.00 400 $1,600
$3.50 500 $1,750
$3.00 600 $1,800
$2.50 700 $1,750
$2.00 800 $1,600
$1.50 900 $1,350
$1.00 1,000 $1,000
$0.50 1,100 $550
$0 1,200 $0
Suppose Kevin and Bette form a cartel and behave as a monopolist. Now, the profit-maximizing price is ________________________per gallon, and total output is __________gallons. As part of their cartel agreement, Kevin and Bette agree to split production equally. Therefore, Kevin’s profit is _____________, and Bette’s profit is __________.
Suppose that Kevin and Bette 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, Kevin says to himself, “Bette and I aren’t the best of friends anyway. If I increase my production to 100 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow.”
After Kevin implements his new plan, the price of water __________
a) increases
b) decreases
to ________ per gallon. Given Bette and Kevin’s production levels, Kevin’s profit becomes __________, Bette’s profit becomes ____________, and total profit (the sum of the profits of Kevin and Bette) is now ___________.
Because Kevin has deviated from the cartel agreement and increased his output of water to 100 gallons more than the cartel amount.
After Bette increases her production, Kevin’s profit becomes ______________ and Bette’s profit becomes ________________.