Back to Assignment Attempts Do No Harm: /5 A-Z 3. Breakdown of a cartel agreement Consider a town in which only two residents, Jake and Latasha, own wells that produce water safe for drinking. Jake and Latasha 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 (Dollars per gallon) 3.60 Quantity Demanded (Gallons of water) Total Revenue (Dollars) 0 0 3.30 35 $115.50 3.00 70 $210.00 2.70 105 $283.50 2.40 140 $336.00 210 175 $367.50 1.80 210 $378.00 1.50 245 $367.50 1.20 280 5336.00 0.90 315 $283.50 0.60 350 $210.00 0.30 $115.50 385 420 0 Homework (Ch 17) Suppose Jake and Latasha forma cartel and behave as a monopolist. The profit maximizing price is 5 per gallon, and the total output gallons. As part of their cartel agreement, Jake and Latasha agree to split production equally. Therefore, Jake's profit is s and Latasha's profit is and Study Tools Offers Suppose that Jake and Latasha 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, Jake says to himself, "Latasha and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, 1 can increase my profit even though her profit goes down. I will do that starting tomorrow." Options Success Tips per gallon. Given Latasha and Jake's production levels, Er Success Tips After Jake implements his new plan, the price of water tos lake's profit becomes 5 and Latasha's profit becomes s DED FOR YOU Because lake has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Latasha decides that she will also increase her production to 35 gallons more than the cartel amount. Lady Tools After Latasha increases her production, Jake's profit becomes 5 Sum of the profits of lake and Latasha) is now 1. Latasha's profit becomes S and total profit (the ils for Principles of True or False Based on the fact that both Jake and Latasha increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity ve Feedback 0 False Nice that lake and Latasha started by behaving cooperatively. However, once Jake decided to cheat, Latasha decided to cheat as well. In other words, Latha's output decisions are based on Jake's actions. The behavior is an example of Homework (Ch 17) Suppose that Jake and Latasha 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, Jake says to himself, "Latasha 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." Tools per gallon. Given Latasha and Jake's production levels, Aiter lake implements his new plan, the price of water to s Jake's profit becomes S and Latasha's profit becomes S DS because lake has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Latasha decides that she will also increase her production to 35 gallons more than the cartel amount. 25 Latasha's profit becomes S and total profit (the After Latasha increases her production, Jake's profit becomes S sum of the profits of lake and Latasha) is now $ 15 True or False Based on the fact that both Jake and Latasha increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity. ples of O True a tit-for-tat strategy False tying Note that lake and Latasha sta a dominant strategy ratively. However, once Jake decided to cheat, Latasha decided to cheat as well. In other words, Latasha's output decisions are a prisoners dilemma This behavior is an example of