Table 17-1
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the table below:
-Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will be the price of water once Rochelle and Alec reach a Nash equilibrium?
A)$15
B)$20
C)$25
D)$30

Question

Table 17-1
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the table below: 
-Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will be the price of water once Rochelle and Alec reach a Nash equilibrium?
A)$15 
B)$20 
C)$25 
D)$30

Quizplus · Accepted Answer

In a Nash equilibrium, each player will choose their best response to the other player's choice. In this case, Rochelle's best response to Alec pumping 6 gallons is to also pump 6 gallons, which gives them both a profit of $60. Similarly, Alec's best response to Rochelle pumping 8 gallons is to also pump 8 gallons, which gives them both a profit of $80. At this equilibrium, the total supply of water is 14 gallons, which meets the demand of the town. The price of water is then determined by dividing the total revenue by the total quantity, which is (60+80)/14 = $10. Therefore, once Rochelle and Alec are no longer able to operate as a monopoly, the price of water will be $10 per gallon. However, this answer is not given as an option, so the closest option is B, which is $20.

Table 17-1 Imagine a Small Town in Which Only Two Residents, Rochelle