Back to Assignment Attempts Keep the Highest / 3 7. Breakdown of a cartel agreement Consider a town in which only two residents, Nick and Rosa, own wells that produce water safe for drinking. Nick and Rosa can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water. Price Quantity Demanded Total Revenue (Dollars per gallon) (Gallons of water) (Dollars) 3.60 3.30 35 $115.50 3.00 70 $210.00 2.70 105 $283.50 2.40 140 $336.00 2.10 175 $367.50 1.80 210 $378.00 1 50 245 $367.50 1.20 280 $336.00 0.90 315 $283.50 0.60 350 $210.00 0.30 385 $115.50 0 420 Suppose Nick and Rosa form a cartel and behave as a monopolist. The profit-maximizing price is |$ per gallon, and the total output is gallons. As part of their cartel agreement, Nick and Rosa agree to split production equally. Therefore, Nick's profit is |$ , and Rosa's profit is $ Suppose that Nick and Rosa have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Nick says to himself, "Rosa and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Nick implements his new plan, the price of water to $ per gallon. Given Rosa and Nick's production levels, Nick's profit becomes $ and Rosa's profit becomes $ Because Nick has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Rosa decides that she will also increase her production to 35 gallons more than the cartel amount. After Rosa increases her production, Nick's profit becomes|$ Rosa's profit becomes $ and total profit (the sum of the profits of Nick and Rosa) is now $ Grade It Now Save & Continue Continue without saving