Table 17-36
The information in the table shows the total demand for water service in Takoma. Assume that there are two companies operating in Takoma. Each company that provides these services incurs an annual fixed cost of $400 and that the marginal cost of providing the service to each customer is exactly $2.00. Figures listed are for an annual service contract.

-Refer to Table 17-36. Assume there are two profit-maximizing water service providers in this market who had formed a successful cartel. Now assume that the cartel breaks down, so that they are not able to collude on the price and quantity of service contracts to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
A)$6500.
B)$8800.
C)$6800.
D)$8000.

Question

​Table 17-36
The information in the table shows the total demand for water service in Takoma. Assume that there are two companies operating in Takoma. Each company that provides these services incurs an annual fixed cost of $400 and that the marginal cost of providing the service to each customer is exactly $2.00. Figures listed are for an annual service contract.
​ 
-Refer to Table 17-36. Assume there are two profit-maximizing water service providers in this market who had formed a successful cartel. Now assume that the cartel breaks down, so that they are not able to collude on the price and quantity of service contracts to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
A)​$6500. 
B)​$8800. 
C)​$6800. 
D)​$8000.

Quizplus · Accepted Answer

To find the Nash equilibrium, we need to find the point where no firm has an incentive to change their strategy. In this case, the strategies of each firm are the quantity of service contracts they offer.
Using the table, we can see that the total demand for water service in Takoma is 6800. Each firm incurs a fixed cost of $400, so their total costs will be $400 + $2(quantity of service contracts they offer). Therefore, their profits will be:
Total revenue - total cost = 10(quantity of service contracts they offer) - ($400 + $2(quantity of service contracts they offer))
Simplifying this equation, we get:
Profit = $10(quantity of service contracts they offer) - $400 - $2(quantity of service contracts they offer)
Profit = $8(quantity of service contracts they offer) - $400
Now we can calculate the profits for each firm at different quantity levels:
- If both firms produce 0 contracts, their profits are -$400 (they only incur fixed costs).
- If firm 1 produces all 680 contracts, their profit is $4480.
- If firm 2 produces all 680 contracts, their profit is also $4480.
If either firm decides to produce a quantity lower than 680, the other firm can capture a larger share of the market and earn more profit. Therefore, the Nash equilibrium is for both firms to produce 680 service contracts, where each firm will earn $6800 in profit.

​Table 17-36 the Information in the Table Shows the Total Demand for Demand

Table 17-36 the Information in the Table Shows the Total Demand for Demand