Question

Breakdown of a cartel agreement
3. Breakdown of a cartel agreement Aa Aa E Imagine that there is a town in which only two of the residents, Stelios and Sondra, own wells that produce water safe for drinking, and imagine that Stelios and Sondra 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 per Litre ($) Litres Demanded 6. 000 5.50 200 5.00 400 4.50 600 4.00 800 3.50 1,000 1,200 2.50 1,400 2.00 1,600 1.50 1,800 1.00 2,000 0.50 2,200 0.00 2,400 Total Revenue (= Total Profit) ($) 0 1,100 2,000 2,700 3,200 3,500 3,600 3,500 3,200 2,700 2,000 1,100 3.00 0 Imagine Stelios and Sondra form a cartel and behave as a monopolist. Now, the profit-maximising price is per litre, and the total output is litres. As part of their cartel agreement, Stelios and Sondra agree to split production equally. Therefore, Stelios's profit is , and Sondra's profit is Imagine that Stelios and Sondra 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, Stelios says to himself, "Sondra and I aren't the best of friends anyway. If I increase my production to 200 litres more than the cartel amount, I can increase my profit, even though her profit goes down. I will do that starting tomorrow."

Answer 1

Zitres demanded Tқ ( proE) 20 Чор Oo8 (обо 1200 І тро 2006 2700 З 200 35 3600 - топ 3500 32 00 2106 3 1406 1 боб 16об 2офо 2007 2011 2200 2400

untel Acort Profit max puce is $3 . Total output is 1200 litres sebess fofit = 3600/2 = $1800 v sondra's pussit = 3600/2 = $1800 Pfler stellos deviates Price of water falls to $2.50 per litre harier stellos mas producing 1200/2 = 600 now he will produce boo+200 - 800 seetlo's feeshit lecomes 800x2.5 = $2000 sondras fugit is 600 X 2.5 = $1500 → After sondra deniates to produce 200 more its too heures Steue's freefit = 800x 2 = $600 sondra's begit = 900 X 2 = $ 1600 Total prefit = 1600 + 1600 = $3200

Duuruus (313-152) S FALSE. Both the producers that the output effect was puie effect assumed greater than because autput effect would increase profits & fruie effect would decrease profits. ' y This outcome is an example of prisoners dilemma. when the outcome is not optimum but none of the player will choose the lutter option as there is a possibility that buer deniates & to increase his Sunday layot and that player's Week 45 hayo will fall o The Prophe's Birthday (Milad un Nabija (314 - 051)