Table 17-2
Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below:
-Refer to Table 17-2. Suppose the town enacts new antitrust laws that prohibit Abby and Brad from operating as a monopoly. How much profit will Abby and Brad each earn once they reach a Nash equilibrium?
A)$36
B)$32
C)$18
D)$16

Question

Table 17-2
Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: 
-Refer to Table 17-2. Suppose the town enacts new antitrust laws that prohibit Abby and Brad from operating as a monopoly. How much profit will Abby and Brad each earn once they reach a Nash equilibrium?
A)$36 
B)$32 
C)$18 
D)$16

Quizplus · Accepted Answer

Once they reach a Nash equilibrium, they will each produce 4 gallons of water, as this is the point at which their individual marginal revenue equals zero. At a price of $9 per gallon, each of them will earn a total revenue of $36 (4 gallons x $9 per gallon). Since their marginal cost is zero, this will also be their profit. However, if the town enacts new antitrust laws, Abby and Brad will have to compete, driving down the price to $8 per gallon. At this price, each of them will earn a total revenue of $32 (4 gallons x $8 per gallon), resulting in a profit of $32.

Table 17-2 Imagine a Small Town in Which Only Two Residents, Abby