Attempts I I Average .I' 5 3. Breakdown of a cartel agreement Consider a town in which only two residents, Amrit and Aideen, own wells that produce water safe for drinking. Amrit and Aideen can pump and sell as much water as they want at no cost. For tn em, total revenue equals prot. The following table shows the town's demand schedule for water. Price Quantity Demanded Total Revenue (Dollars per gallon) {Gallons of water} (Dollars) 4.80 0 0 4.40 35 $154.00 4.00 ?0 $2 80 .0 0 3.60 105 $373.00 3 .20 140 $448.0 0 2.30 175 $490.00 2.40 210 $504.00 2.00 245 $490.00 1.60 230 $448.0 0 1.20 315 $373.00 0.80 350 $280.00 0.40 335 $154.00 0 420 0 Suppose Amrit and Aideen form a cartel and behave as a monopolist. The prot-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 prot 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 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 Amrit implements his new plan, the price of water V to per gallon. Given Aideen and Amrit's production levels, Amrit's profit becomes and Aideen's prot becomes . Because Amrit has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Aideen decides that she will also increase her production to 35 gallons more than the cartel amount. After Aideen increases her production, Amrit'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 larger than the price effect at that quantity. '22} True '22} False Amrit and Aideen have each cheated on their cartel agreement and increased production by 35 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Amrit's profit when he produces 7'0 gallons more than the cartel amount compared to his prot when he produces 35 gallons more than the cartel amount.) Neither Amrit nor Aideen has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an Continue without saving example of v