Question

The cartel

Consider a town in which only two residents, Hubert and Kate, own wells that produce water safe for drinking. Hubert and Kate 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.

Price	Quantity Demanded	Total Revenue
(Dollars per gallon)	(Gallons of water)	(Dollars)
4.20	0	0
3.85	40	154.00
3.50	80	280.00
3.15	120	378.00
2.80	160	448.00
2.45	200	490.00
2.10	240	504.00
1.75	280	490.00
1.40	320	448.00
1.05	360	378.00
0.70	400	280.00
0.35	440	154.00
0	480	0

Suppose Hubert and Kate 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, Hubert and Kate agree to split production equally. Therefore, Hubert's profit is

, and Kate's profit is

.

Suppose that Hubert and Kate 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, Hubert says to himself, "Kate and I aren't the best of friends anyway. If I increase my production by 40 gallons, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Hubert implements his new plan, the price of water   to

per gallon. Given Kate and Hubert's production levels, Hubert's profit becomes

and Kate's profit becomes

.

Because Hubert has deviated from the cartel agreement and increased his output of water by 40 gallons, Kate decides that she will also increase her production by 40 gallons.

After Kate increases her production, Hubert's profit becomes

, Kate's profit becomes

, and total profit (the sum of the profits of Hubert and Kate) is now

.

Note that Hubert and Kate started by behaving cooperatively. However, once Hubert decided to cheat, Kate decided to cheat as well. In other words, Kate's output decisions are based on Hubert's actions.

This behavior is an example of?

Answer 1

Suppose Hubert and Kate form a cartel and behave as a monopolist. The profit maximizing price is $2.10 per gallon, and the total output is 240gallons. As apart of their cartel agreement, Hubert and Kate agree to split production equally. Therefore Hubert's profit is $252, and Kate's profit is $252.

Suppose that Hubert and Kate have been successfully operating as a cartel. They each charge the Monopoly price bad sell half of the Monopoly quantity. Then one night before going to sleep, Hubert says to himself," Kate and I arenot the best friends anyway. If I increase my production to 40gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tommorow.

After Hubert implements his new plan, the price of water decreases to $1.75.per gallon. Given Kate and Hubert's production levels, Hubert's profit becomes $400 and Kate's profit becomes $90

Beacuse Hubert has deviated from the cartel agreement and increased his output of water to 40gallons more than the cartel amount Kate decides that she will also increase her production to 40gallons more than the cartel amount.

After Kate increases her production, Hubert's profit becomes $224, Kate's profit becomes $224, and total profit (the sum of the profits of Hubert and Kate ) is now $448.

For the above data MR has been calculated to find maximising level

MR is equal to change in total revenue due to change in quantity demanded

  thus MR is positive lastly at price 2.10

False

The price effect is greater than the output effect as the price falls, the total revenue also decreases and as the output rises the total revenue also rises.

This is an example of courNot Nash equilibrium.