Table 17-5. Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj can pump as much water as they want without cost so that the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table below.

-Refer to Table 17-5.Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating as a monopolist.What will the new price of water be once the Nash equilibrium is reached?
A) $3
B) $4
C) $5
D) $6

Question

Table 17-5. Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj can pump as much water as they want without cost so that the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table below.
 
-Refer to Table 17-5.Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating as a monopolist.What will the new price of water be once the Nash equilibrium is reached?
A) $3 
B) $4 
C) $5 
D) $6

Quizplus · Accepted Answer

In the current situation where Kunal and Naj act as a monopolist, they will maximize their joint profits by producing and selling 18 gallons of water at a price of $6, earning them a total revenue of $108. 
When they are prohibited from operating as a monopolist, they will have to compete with each other to sell water. The Nash equilibrium will occur when both of them produce 9 gallons of water and sell it at a price of $4, which will earn them a total revenue of $36 each. Hence, the new price of water will be $4.