Increase decrease Example of predatory pricingresale price m

3. Breakdown of a cartel agreement ly two residents, Tim and Alyssa, own wells that produce water safe for drinking. Tim and Alysse can pump and sell as Is profit. The following table shows the town\'s demand schedule for water. Quantity Demanded (Gallons of water) Price Total Revenue (Dollars) (Dollars per gallon) $247.50 $450.00 $607.50 $720.00 $787.50 $810.00 $787.50 $720.00 $607.50 $450.00 $247.50 45 4.50 4.00 3.50 3.00 2.50 2.00 180 225 270 315 1.00 450 540 per gallon, and the total output is , and Suppose Tim and Alyssa form a cartel and behave as a monopolist. The profit-maximizing price is S gallons. As part of their cartel agreement, Tim and Alyssa agree to spit production equally. Therefore, Tim\'s Suppose that Tim and Alyssa have been successfully operating as a quantity. Then one night before going to sleep, Tim says to himself, Alyssa and I aren\'t the best of friends anyway. If I increase gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow.\" cartel. They each charge the monopoly price and sell half of the monapoly

Solution

Answer:- the profit maximizing price is...........per gallon and the total output is .....gallon.

Correct option:- $3 ; 270 Gallons

Reason:- $3 represents the maximum profit which is $810 as there is no cost associated with the water production.

Answer:- As part of their cartel agreement , Tim and Alyssa         agree to split production equally , therefore Time’s profit is ...................Alyssa’s profit is.................

Correct Answer:- Total profit = $810

Tim/Alyssa’s profit = $810/2=$405

Answer:- After Tim implements his new plan the price of water ...........to $.... per gallon. Given Alyssa and Tim’s production level, Tim’s profit become...........and Alyssa;’s profit becomes.................

Correct Answer- Decreases ; $2.5

Tim’s profit = $2.5*(135+45)= $450

Alyssa’s profit = $2.5*135=$337.5

Answer:- After Alyssa increases her production, Tim’s profit become...........and Alyssa;’s profit becomes................. and total profit is now

Correct Answer:- Total production =270+45+45=360

Price a production of 360 gallons =$2

Tim’s profit=$2*135+45=$360

Alyssa’s profit=$2*135+45=$360

Total Profit = $360*2=$720

Question:- Based on the fact that Tim and Alyssa both increased production from the initial cartel quantity, you know that the output effect was greater than the price effect.

Answer:- True, Both firms increased their output; the price only increased in response to the demand for drinking water. This means that the output effect was greater than the price effect.