Consider a town in which only two residents, Jacques and Kyoko, own wells that p
ID: 1213457 • Letter: C
Question
Consider a town in which only two residents, Jacques and Kyoko, own wells that produce water safe for drinking. Jacques and Kyoko 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. Suppose Jacques and Kyoko form a cartel and behave as a monopolist. The profit-maximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, Jacques and Kyoko agree to split production equally. Therefore, Jacques's profit is, and Kyoko's profit is Suppose that Jacques and Kyoko 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, Jacques says to himself, "Kyoko and I aren't the best of friends anyway. If I increase my production to 50 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Jacques implements his new plan the price of water per gallon. Given Kyoko and Jacques's production levels, Jacques's profit becomes Kyoko s Profit becomes Because Jacques has deviated from the carter agreement and increased his output of water to 50 gallons more than the cartel amount, Kyoko decides that she will also increase her production to 50 gallons more than the cartel amount. After Kyoko increases her production, Jacques's profit becomes Kyoko's profit becomes and total profit (the sum of the profits of Jacques and Kyoko) is now Note that Jacques and Kyoko started by behaving cooperatively. However, once Jacques decided to cheat, Kyoko decided to cheat as well. In other words, Kyoko's output decisions are based on Jacques's actions.Explanation / Answer
A. $1.50 (where profit is maximum, i.e. $450)
B. 300 gallons
C. $225
D. $225
E. Decrease
F. $1.25 (Because now total production = Kyoko's 150 + Jacques's 200 = 350 gallon. 350 gallon is demanded at price of $1.25)
G. $250 (i.e. $1.25 * 200)
H. $188 (i.e. $1.25 * 150)
I. $200 (i.e. $1.00 * 200)
J. $200 (i.e. $1.00 * 200)
K. $400 (i.e. $200 + $200)
L. a tit-for tat- strategy