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(Solved): 2. Breakdown of a cartel agreement Consider a town in which only two residents, Daniel and Gabriell ...
2. Breakdown of a cartel agreement Consider a town in which only two residents, Daniel and Gabrielle, own wells that produce water safe for drinking. Daniel and Gabrielle 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 Daniel and Gabrielle 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, Daniel and Gabrielle agree to split production equally, Therefore, Danier's profit is , and cabrielle's profit is Supose that Daniel and Gabrielle have been successfully operating as a cartel. They each charge the monopoly peice and sell half of the monopoly quantity. Then one night before going to sleep, Daniel says to himself, "Gabrielle and I aren't the best of friends anyway. If I increase my production to 45 gollons more than the cartel amount, 1 can increase my profit even though her profit goes down. I wal do that starting tomorrow." that she will also incresse her production to 45 gollons more than the cartel amount. After Caterelie increaces her production, Daniers proft becomes , Cabrietle's prodit becomes , and total profit (the sum of the poofits of Darect and Gabrielle) is now was latger than the price effect at that puantity. True tit.