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Homework answers / question archive / Suppose Yakov and Ana form a cartel and behave as a monopolist
Suppose Yakov and Ana 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, Yakov and Ana agree to split production equally. Therefore, Yakov's profit is _____ , and Ana's profit is _____. Suppose that Yakov and Ana 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, Yakov says to himself, "Ana and I aren't the best of friends anyway. If I increase my production to 45 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Yakov implements his new plan, the price of water to per gallon. Given Ana and Yakov's production levels, Yakov's profit becomes _____ and Ana's profit becomes _____. Because Yakov has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Ana decides that she will also increase her production to 45 gallons more than the cartel amount. After Ana increases her production, Yakov's profit becomes _____, Ana's profit becomes _____, and total profit (the sum of the profits of Yakov and Ana) is now _____.
In a cartel that operates like a monopoly, the price which the two firms charge combined is the profit maximizing point. Together, it is impossible for the two of them to make any more profits. They split the volume of output and charge the same price. If Yakov increases his initial quantity, his profits increase and Ana's decrease. When Ana increases her output to the same amount as Yakov, they have the same output but they are not producing at a profit maximization point. This causes Yakov's profits to decrease and Ana's profits to be equal to Yakov's. However, both of their profits are below the profit maximizing point. The total profits of the two of them decrease under the profit maximizing point.
