Consider a town in which only two residents, Kevin and Maria, own wells that pro
ID: 1106936 • Letter: C
Question
Consider a town in which only two residents, Kevin and Maria, own wells that produce water safe for drinking. Kevin and Maria 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) 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 45 90 135 180 225 270 315 360 405 450 495 540 248 450 608 720 788 810 788 720 608 450 248Explanation / Answer
Maria and Kevin are acting as monopolist so they charge a price which is determined by MR = MC. Since MC = 0, MR is 0 when TR is maximum. Thus, price is $3 and quantity or total output is 275 gallons. Total profit is 810 so Kevin's share in profit is 405 and Maria's share is 405
After Kevin makes changes in production levels he increases his share of 135 gallons to 180 gallons while Maria still produces 135 gallons. Hence market total output is 315 gallons. At this level, price is $2.50.
Kevin earns a profit of 2.50*180 = $450 and Maria earns a profit of $2.5*135 = $337.5
When Maria also retailiates, her production is 135 + 45 = 180 gallons which reduces the price to $2. The profits are now $2*180 = $360 each for Both Maria and Kevin or $720 in total for both.