Consider a town in which only two residents, Shen and Valerie, own wells that produce water safe for drinking. Shen and Valerie 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) 3.60 0 3.30 35 $115.50 3.00 70 $210.00 2.70 105 $283.50 2.40 140 $336.00 2.10 175 $367.50 1.80 210 $378.00 1.50 245 $367.50 1.20 280 $336.00 0.90 315 $283.50 0.60 350 $210.00 0.30 385 $115.50 0 420 0 Suppose Shen and Valerie form a cartel and behave as a monopolist. The profit-maximizing price is|$ per gallon, and the total output is gallons. As part of their cartel agreement, Shen and Valerie agree to split production equally. Therefore, Shen's profit is |, and Valerie's profit is|$ Suppose that Shen and Valerie 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, Shen says to himself, "Valerie 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." After Shen implements his new plan, the price of water to $ per gallon. Given Valerie and Shen's production levels, Shen's profit becomes |$ and Valerie's profit becomes |$ Because Shen has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Valerie decides that she will also increase her production to 35 gallons more than the cartel amount. After Valerie increases her production, Shen's profit becomes | $ , Valerie's profit becomes $ , and total profit (the sum of the profits of Shen and Valerie) is now |$Consider a town in which only two residents, Shen and Valerie, own wells that produce water safe for drinking. Shen and Valerie 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) 3.60 0 3.30 35 $115.50 3.00 70 $210.00 2.70 105 $283.50 2.40 140 $336.00 2.10 175 $367.50 1.80 210 $378.00 1.50 245 $367.50 1.20 280 $336.00 0.90 315 $283.50 0.60 350 $210.00 0.30 385 $115.50 0 420 0 Suppose Shen and Valerie form a cartel and behave as a monopolist. The profit-maximizing price is |$ per gallon, and the total output 5 gallons. As part of their cartel agreement, Shen and Valerie agree to split production equally. Therefore, Shen's profit is $ , and Valerie's profit is |$ Suppose that Shen and Valerie 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, Shen says to himself, "Valerie 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." After Shen implements his new plan, the price of water to $ per gallon. Given Valerie and Shen's production levels, Shen's profit becomes |$ and Valerie's hes decreases Because Shen has deviated from the cartel agreement & increases I his output of water to 35 gallons more than the cartel amount, Valerie decides that she will also increase her production to 35 gallons there chun me cartel amount After Valerie increases her production, Shen's profit becomes $ Valerie's profit becomes $ , and total profit (the sum of the profits of Shen and Valerie) is now | $True or False: Based on the fact that both Shen and Valerie increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. O True O False Note that Shen and Valerie started by behaving cooperatively. However, once Shen decided to cheat, Valerie decided to cheat as well. In other words, Valerie's output decisions are based on Shen's actions. This behavior is an example ofTrue or False: Based on the fact that both Shen and Valerie increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. O True a tit-for-tat strategy O False a dominant strategy Note that Shen and Valerie stat tying atively. However, once Shen decided to cheat, Valerie decided to cheat as well. In other words, Valerie's output decisions are b a prisoners' dilemma This behavior is an example of
