Pleasant Island has two natural gas wells, one owned by Mack and the other owned
ID: 1116447 • Letter: P
Question
Pleasant Island has two natural gas wells, one owned by Mack and the other owned by Tom. Each well has a valve that controls the rate of flow of gas, and the marginal cost of producing gas is zero. The table below gives the demand schedule for gas on this island.
If Mack and Tom form a cartel and maximize their joint profits, the price of gas on Pleasant Island will be $_ per unit
If Mack and Tom are forced to sell at the perfectly competitive price, the price of gas on Pleasant Island will be $_ per unit
price quanity demanded 10 0 7 5 5 10 3 15 2 20 1 25 0 30Explanation / Answer
Given that the marginal cost is zero. Cartel act as a monopoly so it will charge a price and producer quantity corresponding to the MR = MC RULE. In this case MC is zero. Hence, the cartel will maximize revenue. Revenue is maximized when price is $5 and quantity demanded is 10. This implies that if Mac and Tom from a cartel, the price of gas will be $5 per unit.
Competitive market price will be $0 per unit because marginal cost is zero.