microeconomics book solution 15

# Price of quantity of bottled bottled water water

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Price of Quantity of bottled bottled water water demanded Total revenue Marginal revenue (per liter) (millions of liters) (millions) (millions) 10 0 0 9 9 1 9 7 8 2 16 5 7 3 21 3 6 4 24 1 5 5 25 1 4 6 24 3 3 7 21 5 2 8 16 7 1 9 9 C H A P T E R 1 5 O L I G O P O LY S-213 S209-S220_Krugman2e_PS_Ch15.qxp 9/16/08 9:23 PM Page S-213

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Solution S-214 C H A P T E R 1 5 O L I G O P O LY 5. To preserve the North Atlantic fish stocks, it is decided that only two fishing fleets, one from the United States and the other from the European Union (EU), can fish in those waters. The accompanying table shows the market demand schedule per week for fish from these waters. The only costs are fixed costs, so fishing fleets maxi- mize profit by maximizing revenue. a. If both fishing fleets collude, what is the revenue-maximizing output for the North Atlantic fishery? What price will a pound of fish sell for? b. If both fishing fleets collude and share the output equally, what is the revenue to the EU fleet? To the U.S. fleet? c. Suppose the EU fleet cheats by expanding its own catch by 100 pounds per week. The U.S. fleet doesn’t change its catch. What is the revenue to the U.S. fleet? To the EU fleet? d. In retaliation for the cheating by the EU fleet, the U.S. fleet also expands its catch by 100 pounds per week. What is the revenue to the U.S. fleet? To the EU fleet? 5. a. The accompanying table calculates the total revenue for the entire North Atlantic fishery for different output quantities. The revenue-maximizing output is 2,000 pounds per week, which will fetch a price of \$16 per pound. b. If they share the output equally, the U.S. and the EU fleets will each catch 1,000 pounds per week and have revenue of \$16,000 per week. c. If the EU fleet cheats and catches 100 pounds more, the total caught will be 2,100 pounds, which will cause the price to fall to \$15. The EU fleet’s revenue will now be 1,100 × \$15 = \$16,500, and the U.S. fleet’s revenue will fall to 1,000 × \$15 = \$15,000. d. Now the total caught will be 2,200 pounds, which will bring the price down to \$14 per pound. Since each fleet now catches 1,100 pounds, each will have revenue of 1,100 × \$14 = \$15,400. Price of fish Quantity of fish (per pound) demanded (pounds) Total revenue \$17 1,800 \$30,600 16 2,000 32,000 15 2,100 31,500 14 2,200 30,800 12 2,300 27,600 Price of fish Quantity of fish (per pound) demanded (pounds) \$17 1,800 16 2,000 15 2,100 14 2,200 12 2,300 S209-S220_Krugman2e_PS_Ch15.qxp 9/16/08 9:23 PM Page S-214
Solution 6. Suppose that the fisheries agreement in Problem 5 breaks down, so that the fleets behave noncooperatively. Assume that the United States and the EU each can send out either one or two fleets. The more fleets in the area, the more fish they catch in total but the lower the catch of each fleet. The accompanying matrix shows the profit (in dollars) per week earned by the two sides. a. What is the noncooperative Nash equilibrium? Will each side choose to send out one or two fleets?

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