4. Both Tom Haverford and Dr. Saperstein run a teen clothing rental service. Tom Haverford owns Rent a Swag and Dr. Sape

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4 Both Tom Haverford And Dr Saperstein Run A Teen Clothing Rental Service Tom Haverford Owns Rent A Swag And Dr Sape 1 (241.77 KiB) Viewed 9 times

4. Both Tom Haverford and Dr. Saperstein run a teen clothing rental service. Tom Haverford owns Rent a Swag and Dr. Saperstein owns Tommy's Closet, and they compete fiercely for customers. The market demand for their services is 160-2p. The marginal cost of running the business is the same for both firms: $10. a. What is the equilibrium market price? [3 points] b. What is the social optimal quantity? [2 points] Jean-Ralphio wants Dr. Saperstein and Tom Haverford to make up and form an alliance or cartel. As an alliance, both Tom and Dr. Saperstein would both choose an agreed upon price, and then share the profits equally. c. What price should Tom and Dr. Saperstein agree on? [6 points] d. How much would Tom and Dr. Saperstein both earn? [5 points] Regulators catch wind that a cartel has formed in Pawnee and form plans to break up the cartel. They ask Mona-Lisa to convince Dr. Saperstein to lower the price at Tommy's Closet from the agreed upon price in Part c. by 1 dollar. e. If Dr. Saperstein follows Mona-Lisa's advice without Tom's knowledge, what would be Tom's and Dr. Saperstein's new profit? [6 points] f. Using your answer in Part e., provide a brief explanation on why cartels are difficult to maintain. [8 points]