Imagine a small town in which only two residents, Rochelle and Alec, own wells t
ID: 1126863 • Letter: I
Question
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below Quantity (in gallons) PriceTotal Revenue (Profit) 60 50 45 40 35 30 25 20 15 10 5,500 10,000 13,500 16,000 17,500 18,000 17,500 16,000 13,500 10,000 5,500 100 200 400 500 600 700 900 1,000 1,100 1,200 If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge? (a) 25 (b) 30 (d) 40 Suppose that the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will the price of water be once Rochelle and Alec reach a Nash equilibrium'? a) 15 (b) 20 (c) 25 (d) 30Explanation / Answer
a.) When Rochelle and Alec operate as a profit-maximizing monopolist. What price will they charge for water?
Sol : option B) 30
here the profit maximizes at 18,000
b) Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will be the price of water once Abby and Brad reach a Nash equilibrium?
Sol . option option b) 20
The price would fall to $20 because each would try to earn more profit by producing one more item;