questions in the picture
3. Breakdown of a cartel agreement Consider a town in which only two residents, Larry and Megan, own wells that produce water safe for drinking. Larry and Megan 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) 4.20 0 0 3.85 30 $115.50 3.50 60 $210.00 3.15 90 $283.50 2.80 120 $336.00 2.45 150 $367.50 2.10 180 $378.00 1.75 210 $367.50 1.40 240 $336.00 1.05 270 $283.50 0.70 300 $210.00 0.35 330 $115.50 0 360 0 Suppose Larry and Megan form a cartel and behave as a monopolist. The profitmaximizing price is $ is per gallon, and the total output gallons. As part of their cartel agreement, Larry and Megan agree to split production equally. Therefore, Larry's profit is $ , and Megan's profit is $ . Suppose that Larry and Megan 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, Larry says to himself, "Megan and I aren't the best of friends anyway. If I increase my production to 30 gallons more than the cartel amount, I can increase my profit even though her prot goes down. I will do that starting tomorrow." After Larry implements his new plan, the price of water Larry's profit becomes and Megan's prot becomes . VtO $ per gallon. Given Megan and Larry's production levels, Because Larry has deviated from the cartel agreement and increased his output of water to 30 gallons more than the cartel amount, Megan decides that she will also increase her production to 30 gallons more than the cartel amount. After Megan increases her production, Larry's prot becomes $ sum of the prots of Larry and Megan) is now $ . , Megan's prot becomes , and total profit (the True or False: Based on the fact that both Larry and Megan increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. 0 True 0 False Larry and Megan have each cheated on their cartel agreement and increased production by 30 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 prot. (To see this for yourself, consider Larry's profit when he produces 60 gallons more than the cartel amount compared to his prot when he produces 30 gallons more than the cartel amount.) Neither Larry nor Megan has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of V. predatory pricing eated on their cartel agreement and increased production by 30 gallons more than the cartel amount. However, they e to increase output beyond this amount, they'll each suffer a decrease in prot. (To see this for yourself, consider resale price maintenance . s 60 gallons more than the cartel amount compared to his prot when he produces 30 gallons more than the cartel tying a Nash equilibrium n incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example v
