Question

Five people live in a village and have no other employment or income earning
possibilities besides fishing. They each own a boat that is suitable for fishing, but does
not have any resale value. Fish are worth $5 per pound and the cost of operating the
boat is $500 per month. They all fish in a river next to the village, and they have
determined that when there are more of them out there on the river fishing, they each
catch less fish per month according to the following schedule:

Boats               Fish Caught per Boat (pounds)
1                             200
2                             190
3                             175
4                             155
5                             130
a) If each fisher acts in her own best interest, will she continue to operate her boat
each month? If so, how much profit will she earn per month?
b) If the fishers band together and act as a group, how many boats will they choose
to operate? If revenue is divided evenly, how much will each fisher make?

Answer 1

a) When fisherman acts in their own best interest it would result in five boats out fishing and each boat catches 130 pounds of fishes. Now the make $650 which would cover their marginal cost for operating the boat i.e. $500 per month; and thus will earn an income of $150 (= $650 - $500).

b) When fishermen band together and act to be a group they will prefer to operate three boats. The reason is that they will maximize their earnings at this point. Their total income will be $1,125 [(= $175 * 3 boats * $5 per fish) - $1500 marginal cost); and when the total income is divided equally among the five fisherman, each will earn $225 (= $1,125/5)