The accompanying table calculates total revenue and marginal revenue for the cartel. The cartel maximizes profit by producing whenever marginal revenue is greater than marginal cost (which here is 2). That is, the cartel produces a quan- tity of 4 million liters and sells them at a price of 6 per liter. If the firms divide production equally, each produces 2 million liters and has revenue of 2 million 6 = 12 million. Since the fixed cost is 1 million and each liter's marginal cost is 2, each firm has profit of 12 million 1 million - (2 million 2) = 7 million. Price of bottled water (per liter) 10 Quantity of bottled water demanded (millions of liters) Total revenue (millions) Marginal revenue (millions) 0 0 9 9 1 9 7 8 2 16 5 7 3 21 3 6 4 24 1 5 5 25 5 -1 4 6 24 -3 3 7 21 -5 2 8 16 -7 6 9 1 b. If Perrier increases production by 1 million liters, the total produced now is 5 mil- lion liters and the price is 5. Perrier now produces 3 million liters and so has profit of (3 million 5) - 1 - (3 million 2) = 8 million. Evian's profit, however, falls to (2 million 5) - 1 million - (2 million 2) = 5. c. If Perrier increases production by 3 million liters, the total produced is 7 million liters and the price is 3. Perrier produces 5 million liters and so has profit of (5 million x 3) - 1 million - (5 million 2) = 4 million. This profit is lower than in part b. This implies that although Perrier has an incentive to increase production somewhat, it does not have an incentive to increase produc- tion dramatically. d. Since each firm can significantly increase its profit by moderately increasing pro- duction, the likelihood of cheating is high.