Consider a town in which only two residents, Antonio and Caroline, own wells tha
ID: 1211775 • Letter: C
Question
Consider a town in which only two residents, Antonio and Caroline, own wells that produce water safe for drinking. Antonio and Caroline can pump and seM 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. Suppose Antonio and Caroline form a cartel and behave as a monopolist. The profit-maximizing price is per gallon, and the total output gallons. As part ol their cartel agreement. Antonio and Caroline agree to split production equally. Therefore, Antonio's profit is and Caroline'sprofit is Suppose that Antonio and Caroline have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Ihen one night before going to sleep, Antonio says to himself, "Caroline and I aren't the best of friends anyway. If I increase my production to 45 gallons more than the cartel amount, 1 can increase my profit even though her profit goes down. I will do that starting tomorrow." Alter Antonio Implements his new plan, the price of water per gallon. Given Caroline and Antonio's production. After cardine increases her producton, Antonlo's profit becomes cardine's profit becomes and total profit (the sum profits of antonils and carollne) is nowExplanation / Answer
Answer:
From the given information, there are two towns Antonio and Caroline, and producing safe drinking water. No cost for making safe dinking water; means that total revenue is equals to profits.
Suppose Antonio and Caroline form a cartel and behave as a monopolist. The profit-maximizing price is $3 per gallon and the total output is 270 gallons. As part of their cartel agreement, Antonio and Caroline agree to spit production equally. Therefore, Antonio’s profit is $405, and Caroline’s profit is $405. It is easy to see that profits are maximized at a price of $3.00 and output is 270 (and total profits are $810).
Suppose that Antonio and Caroline 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, Antonio says to himself, “Caroline and I aren’t the best of friends anyway. If I increase my production to 45 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow.
After Antonio implements his new plan, the price of water decreases to $2.50 per gallon. . At a price of $2.50, with Antonio increasing his share of production from 405 to 450, he would earn a profit of $855. Bette's profit would be the new price of $2.50 times her (unchanged) output of 405. The total profit is the sum of $450 and $405, or $855.
Because Antonio has deviated from the cartel agreement and increase his output of water to 45 gallons more than the cartel amount Caroline decides that will also increase her production to 45 gallons more than the cartel amount.
After Caroline increase her production, Antonio’s profit becomes $490, Caroline’s profit becomes $490, and total profit is: $980 (that is the sum of profits of Antonio and Caroline) at price of $2.