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 (Dollars per gallon) Quantity Demanded (Gallons of water) Total Revenue (Dollars)
$3.60 0 0
$3.30 35 $115.50
$3.00 70 $210.00
$2.70 105 $283.50
$2.40 140 $336.00
$2.10 175 $367.50
$1.80 210 $378.00
$1.50 245 $367.50
$1.20 280 $336.00
$0.90 315 $283.50
$0.60 350 $210.00
$0.30 385 $115.50
$0 420 0
1) Suppose Larry and Megan form a cartel and behave like a monopolist. What is the profit maximizing price per gallon and the total output? If they split profits evenly what is each ones profit?
2) If Larry increases his production by 35 gallons without Megan does the price of water increase or decrease? What is the price per gallon? What is Larry's profit? What is Megan's profit?
3) If Megan increases her production by 35 gallons also what is Larry's profit? What is Megan's profit? What is the total profit?
4) True or false: Based on the fact that Larry and Megan both increased production from the initial cartel quantity, you know that the output effect was larger than the price effect.
5) Larry cheated first, then Megan cheated next. Megan's output decisions are based on Larry's. This behavior is an example of _____?