Table 16-7
Suppose the countries of Xania and Pluntia share the world supply of water. Suppose that the marginal cost of bottling water is a constant $4 per gallon, and the demand for water is described by the following schedule:

-Refer to Table 16-7.If Xania and Pluntia formed a cartel,what would be the price and quantity?
A)$7, 300
B)$6, 400
C)$5, 500
D)$4, 600

Question

Table 16-7
Suppose the countries of Xania and Pluntia share the world supply of water. Suppose that the marginal cost of bottling water is a constant $4 per gallon, and the demand for water is described by the following schedule:
 
-Refer to Table 16-7.If Xania and Pluntia formed a cartel,what would be the price and quantity?
A)$7, 300 
B)$6, 400 
C)$5, 500 
D)$4, 600

Quizplus · Accepted Answer

If Xania and Pluntia form a cartel, they would act like a monopoly and jointly maximize their profits. As the marginal cost of bottling water is constant at $4 per gallon, the cartel would set the price where their combined demand is equal to their combined marginal cost; this is known as the joint profit-maximizing point. From the table, we can see that the combined demand at a price of $7 per gallon is 800 gallons, which is equal to their combined marginal cost of $4 per gallon. Therefore, the cartel would set the price at $7 per gallon and sell 800 gallons of water, which would generate a total revenue of $5,600 ($7 x 800). Since the cost of producing 800 gallons is $3,200 ($4 x 800), the cartel's profit would be $2,400 ($5,600 - $3,200). However, this assumes that they can successfully coordinate their output and pricing strategies, which may not be easy in practice.

Table 16-7 Suppose the Countries of Xania and Pluntia Share the World