Suppose that the market demand for mountain spring water is given as follows:

P = 1200 - Q

Mountain spring water can be produced at no cost, so MC=0.

Suppose that there is only one firm in the market. Marginal revenue for a monopolist is given by MR = 1200 - 2Q.

1. What is the profit maximizing price in this market?

Now suppose that there are two identical firms in the market for mountain spring water from the previous question.

2. What level of output would be produced by each firm in a Cournot duopoly? Marginal revenues are given by

MR1=1200-2q1-q2

MR2=1200-2q2-q1

3. As we saw in class, both firms could earn higher profits if they collude and form a cartel. How much profit could each firm earn if they successfully formed a cartel?

4. As we saw in class, cartel agreements are difficult to enforce and firms have an incentive to deviate from the agreement. Calculate firm 1's profit if they optimally deviate from the cartel agreement, assuming that firm 2 continues to produce their share of the cartel quantity.