3. Breakdown of a cartel agreement Consider a town in which only two residents, Amrit and Aldeen, own wells that produce water safe for drinking. Amrit and Aldeen 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. Suppose Amrit and Aideen 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, Amrit and Aideen agree to split production equally. Therefore, Amrit's profit is , and Aideen's profit is Suppose that Amrit and Aideen 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, Amrit says to himself, "Aideen and 1 aren't the best of friends anyway. If 1 increase my production to 45 galions more than the cartel amount, 1 can increase my profit even though her profit goes down. I will do that starting tomorrow." After Amrit implements his new plan, the price of water to per galion. Given Aideen and Amrit's production levels, Amrit's profit becomes and Aideen's profit becomes Because Amrit has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Adeen decides that she will also increase her production to 45 gallons more than the cartel amount. After Aideen increases her production, Amrit's profit becomes Aldeen's profit becomes , and total profit (the sum of the profits of Amrit and Aideen) is now True or False: Based on the fact that both Amrit and Aideen increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity. True False 45 gallons more than the cartel amount, 1 can increase my profit even though her profit goes down. I will do that starting tomorrow." After Amrit implements his new plan, the price of water to per gallon. Given Aideen and Amrit's production levels, Amrit's profit becomes and Aideen's profit becomes Because Amrit has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Adeen decides that she will also increase her production to 45 gallons more than the cartel amount. After Aideen increases her production, Amnt's profit becomes , Aideen's profit becomes , and total profit (the sum of the profits of Amrit and Aideen) is now True or false: Based on the fact that both Amrit and Aideen increased production from the initial cartel quantity, you know that the output effect was smalier than the price effect at that quantity. True False Note that Amrit and Aideen started by behaving cooperatively. However, once Amrit decided to cheat, Aideen decided to cheat as well. In other words, Aideen's output decisions are based on Amrit's actions. This behavior is an example of True or False: Based on the fact that both Amrit and Aideen increased production from the initial cartel quan smaller than the price effect at that quantity. True False Note that Amrit and Aideen sta 'atively. However, once Amrit decided to cheat, Aideer Aideen's output decisions are b This behavior is an example of
