Consider a town in which only two residents, Alex and Becky, own wells that prod
ID: 1105441 • Letter: C
Question
Consider a town in which only two residents, Alex and Becky, own wells that produce water safe for drinking. Alex and Becky 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 (Gallons of water) 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 35 70 105 140 175 210 245 280 315 350 385 420 $115.50 $210.00 $283.50 $336.00 $367.50 $378.00 $367.50 $336.00 $283.50 $210.00 $115.50 0 Suppose Alex and Becky form a cartel and behave as a monopolist. The profit-maximizing price is $ is and Becky's profit is$ per gallon, and the total output gallons. As part of their cartel agreement, Alex and Becky agree to split production equally. Therefore, Alex's profit is$Explanation / Answer
(a) Profit = Total revenue (TR) - Total cost (TC). In this case since TC = 0, Profit = TR & profit is maximized when TR is maximum.
Profit maximizing price = $1.80 per gallon (Since TR is highest ($378) at this level)
Total output = 210 gallon (Each of Alex & Becky produces (210/2) = 105 gallon).
Alex' profit = $189 (When Alex produces 105 gallons, corresponding TR (= Profit) = $1.8 x 105 = $189)
Becky's profit = $189 (When Becky produces 105 gallons, corresponding TR (= Profit) = $1.8 x 105 = $189)
(b) After Alex implements his plan, Total output = 210 + 35 = 245 gallons. For this output level,
Price Decreases to $1.50 per gallon.
Alex profit = $336 (Earlier Alex was producing (210 / 2) = 105 gallons. Now Alex produces (105 + 35) = 140 gallons, and corresponding TR (= Profit) is $336).
Becky's profit becomes $283.5 (Corresponding to her original output of 105 gallons which she didn't change).
(c) After Becky implements her plan by increasing output by 35, Total output = 245 + 35 = 280 gallons. For this output level, Price is $1.50 per gallon.
Alex profit = $336 (Now Alex produces140 gallons, and corresponding TR (= Profit) is $336).
Becky's profit = $336 (Earlier Beky was producing (210 / 2) = 105 gallons. Now Becky produces (105 + 35) = 140 gallons, and corresponding TR (= Profit) is $336).
Total profit = $672 (= Alex profit + Becky's profit = $336 + $336 = $672)
(d) TRUE
(Output effect is higher than price effect because for both of them, Profit is higher after increase in output).
(e) This behavior is an example of Stackelberg (Leder-Follower) cooperation**.
**Please provide drop-down options in Comment section for exact wording.