Table 17-5.Imagine a small town in which only two residents,Bill and Ben,own wells that produce safe drinking water.Each week Bill and Ben 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 Bill and Ben 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 Bill and Ben 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,Bill and Ben,own wells that produce safe drinking water.Each week Bill and Ben 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 Bill and Ben 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 Bill and Ben 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 a Nash equilibrium, each firm chooses the best strategy given the strategies chosen by other firms. If Bill and Ben cannot operate as a monopolist, they will compete, leading to a price equal to marginal cost, which is $4.