Consider a town in which only two residents, Lorenzo and Neha, own wells that pr
ID: 1227719 • Letter: C
Question
Consider a town in which only two residents, Lorenzo and Neha, own wells that produce water safe for drinking. Lorenzo and Neha 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 Lorenzo and Neha form a cartel and behave as a monopolist. The profit-maximizing price is per gallon, and output is gallons. As part of their cartel agreement, Lorenzo and Neha agree to split production equally. Therefore, Lorenzo's profit is and Neha's profit is Suppose that Lorenzo and Neha 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, Lorenzo says to himself, "Neha and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Lorenzo implements his new plan, the price of water to per gallon. Given Neha and Lorenzo's production levels, Lorenzo's profit becomes and Neha's profit becomes Because Lorenzo has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Neha decides that she will also increase her production to 35 gallons more than the cartel amount. After Neha increases her production, Lorenzo's profit becomes Neha's profit becomes, and total profit (the sum of the profits of Lorenzo and Neha) is nowExplanation / Answer
1. $1.80 per gallons
2. 210 gallons
3 378/2 = $189
4. 378/2 = $189
5. Decreases to
6. $1.50 per gallon
7. Lorenzo profit = $1.50*140 = $210
8 Neha's Profit = $1.50*105 = $157.5
9 Lorenzo profit = $336/2 = $168
10 Neha's Profit = $336/2 = $168
11 Total Profit = $336
If you don't understand anything then comment, I'ill revert back on the same. :)