Table 16-3
Imagine a small town in which only two residents, Robert and John, own wells that produce water for safe drinking. Each Saturday, Robert and John work together to decide how many litres of water to pump, bring the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that Robert and John can pump as much water as they want without cost; therefore, the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table.

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

Question

Table 16-3
Imagine a small town in which only two residents, Robert and John, own wells that produce water for safe drinking. Each Saturday, Robert and John work together to decide how many litres of water to pump, bring the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that Robert and John can pump as much water as they want without cost; therefore, the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table.
 
-Refer to Table 16-3. Suppose the town enacts new anti-trust laws that prohibit Robert and John from operating as a monopolist. What will the new price of water end up being once the Nash equilibrium is reached?
A) $6 
B) $5 
C) $4 
D) $3

Quizplus · Accepted Answer

Once the anti-trust laws are enacted, Robert and John will no longer be able to operate as a monopolist and will have to compete with each other. In a competitive market, the price is set equal to the marginal cost. As the marginal cost of water is zero, the price will be equal to the average cost, which is $4 in this case. Therefore, the new price of water will be $4 once the Nash equilibrium is reached.

Table 16-3 Imagine a Small Town in Which Only Two Residents, Robert