Question

3. Breakdown of a cartel agreement

Consider a town in which only two residents, Jacques and Kyoko, own wells that produce water safe for drinking. Jacques and Kyoko 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	Quantity Demanded	Total Revenue
(Dollars per gallon)	(Gallons of water)	(Dollars)
3.00	0	0
2.75	50	$137.50
2.50	100	$250.00
2.25	150	$337.50
2.00	200	$400.00
1.75	250	$437.50
1.50	300	$450.00
1.25	350	$437.50
1.00	400	$400.00
0.75	450	$337.50
0.50	500	$250.00
0.25	550	$137.50
0	600	0

Suppose Jacques and Kyoko form a cartel and behave as a monopolist. The profit-maximizing price is _____per gallon, and the total output is _____gallons. As part of their cartel agreement, Jacques and Kyoko agree to split production equally. Therefore, Jacques's profit is ______, and Kyoko's profit is. _____

Suppose that Jacques and Kyoko 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, Jacques says to himself, "Kyoko and I aren't the best of friends anyway. If I increase my production to 50 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Jacques implements his new plan, the price of water decreases to _______per gallon. Given Kyoko and Jacques's production levels, Jacques's profit becomes _______ and Kyoko's profit becomes _______.

Because Jacques has deviated from the cartel agreement and increased his output of water to 50 gallons more than the cartel amount, Kyoko decides that she will also increase her production to 50 gallons more than the cartel amount.

After Kyoko increases her production, Jacques's profit becomes ______, Kyoko's profit becomes ______, and total profit (the sum of the profits of Jacques and Kyoko) is now __________

True or False:? Based on the fact that both Jacques and Kyoko increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity.

Jacques and Kyoko have each cheated on their cartel agreement and increased production by 50 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 Jacques's profit when he produces 100 gallons more than the cartel amount compared to his profit when he produces 50 gallons more than the cartel amount.)

Neither Jacques nor Kyoko has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of _________

Answer 1

The profit maximizing price is 1.) $1.50 and output is 2.)300

These points are chosen because at this point the total revenue is maximum.

TR at output=300 is 450.When profitbis split equally then each producer gets equal profit.

Jacques profit is 3.)$175 and Kyoko's profit is 4.)$175.

When Jacques increases his production by 50 units he produces 350 units of output.At 350 units price charged is 5.)$1.25.

An expert answers only the first four questions.Leave a comment in case of a query.