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Consider a town in which only two residents, Mike and Leah, own wells that produce water safe for drinking
Consider a town in which only two residents, Mike and Leah, own wells that produce water safe for drinking. Mike and Leah can pump and sell as much water as they want at no cost. For them, revenue equals profit. The table below shows the town's demand schedule for water.
| Price ($) | Quantity (gallons) | Total profit ($) |
|---|---|---|
| $120 | 0 | $0 |
| $110 | 10 | $1,100 |
| $100 | 20 | $2,000 |
| $90 | 30 | $2,700 |
| $80 | 40 | $3,200 |
| $70 | 50 | $3,500 |
| $60 | 60 | $3,600 |
| $50 | 70 | $3,500 |
| $40 | 80 | $3,200 |
| $30 | 90 | $2,700 |
| $20 | 100 | $2,000 |
| $10 | 110 | $1,100 |
| $0 | 120 | $0 |
4.2. Mike and Leah form a cartel and behave as a monopolist. Now the profit-maximizing price is , and the total output is _ gallons.
A. $0; 120
B. $0; 60
C. $120; 0
D. $60; 60
E. $100; 20
Expert Solution
The answer is D. In a cartel agreement where the profit is maximized the two producers act as one firm. If they were one firm the maximum profit possible based off of the demand schedule is $3,600. That means that they will produce 60 gallons of water at $60 per gallon.
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