Table 16-4
Imagine a small town in which only two residents, Tony and Jill, own wells that produce safe drinking water. Each week Tony and Jill 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. To keep things simple, suppose that Tony and Jill 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 is shown in the table below.

-Refer to Table 16-4.Suppose the town enacts new antitrust laws that prohibit Tony and Jill from operating as a monopolist.What will the new price of water end up being once the Nash equilibrium is reached?
A)$3
B)$4
C)$5
D)$6

Question

Table 16-4
Imagine a small town in which only two residents, Tony and Jill, own wells that produce safe drinking water. Each week Tony and Jill 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. To keep things simple, suppose that Tony and Jill 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 is shown in the table below.
 
-Refer to Table 16-4.Suppose the town enacts new antitrust laws that prohibit Tony and Jill from operating as a monopolist.What will the new price of water end up being once the Nash equilibrium is reached?
A)$3 
B)$4 
C)$5 
D)$6

Quizplus · Accepted Answer

In a Nash equilibrium, each player chooses the best strategy given the strategies chosen by other players. If Tony and Jill cannot operate as a monopolist, they will compete, leading to a price where their individual profits are maximized given the other's price. This typically results in a price equal to marginal cost, which is $4 in this scenario.

Table 16-4 Imagine a Small Town in Which Only Two Residents, Tony