Breakdown of a cartel agreement 1) price is $2 / $10 / $12 / $6 / $0 per gallon

Question

Breakdown of a cartel agreement

1) price is $2 / $10 / $12 / $6 / $0 per gallon

2) and the total output is 500 / 3,000 / 0 / 1,500 / 2,500 gallons.

3) Clancy's profit is $2,500 / $3,000 / $4,500 / $5,000 / $4,000

4) and Carolines profit is $3,000 / $2,500 / $4,500 / $5,000 / $4,000

5) the price of water increases / decreases to

6) $5 / $7 / $4 / $9 per gallon.  

7) Clancy's profit becomes $6,750 / $8,750 / $5,000 / $4,500 / $4,000

8) Carolines profit becomes $4,500 / $4,000 / $8,750 / $3,750 / $3,000

9) Clancy's profit becomes $5,000 / $4,000 / $3,000 / $4,500

10) Carolines profit becomes $5,000 / $4,000 / $3,000 / $4,500

11) and total profit (the sum of the profits of Clancy and Caroline) is now $0.00 / $8,000 / $6,750 / $9,000

12) This behavior is an example of a tit-for-tat strategy / tacit collusion / a prisoners' dillema

Any help would be really appreciated. I've struggled with this for hours now. Thank you so much.

12. Breakdown of a cartel agreement AaAa Suppose that there is a town in which only two of the residents, Clancy and Caroline, own wells that produce water safe for drinking, and suppose that Clancy and Caroline 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 per Gallon Total Revenue (= Total Profit) ($) Gallons Demanded 12 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000 2,750 5,000 6,750 8,000 8,750 9,000 8,750 8,000 6,750 5,000 2,750 10 Suppose Clancy and Caroline form a cartel and behave as a monopolist. Now, the profit-maximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, Clancy and Caroline agree to split production equally. Therefore, Clancy's profit is ,and Caroline's profit is Suppose that Clancy and Caroline 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, Clancy says to himself, "Caroline and I arent the best of friends anyway. If I increase my production to 250 gallons more than the cartel amount, I can increase my profit, even though her profit goes down. I will do that starting tomorrow." per gallon. Given Caroline's After Clancy implements his new plan, the price of water and Clancy's production levels, Clancy's profit becomes to ,Caroline's profit becomes Because Clancy has deviated from the cartel agreement and increased his output of water to 250 gallons more than the cartel amount, Caroline decides that she will also increase her production to 250 gallons more than the cartel amount After Caroline increases her production, Clancy's profit becomes , and Caroline's profit becomes and total profit (the sum of the profits of Clancy and Caroline) is now Note that Clancy and Caroline started by behaving cooperatively. However, once Clancy decided to cheat, Caroline decided to cheat as well. In other words, Caroline's output decisions are based on Clancy's actions. This behavior is an example of

Explanation / Answer

Cartel:

Profit maximizing price = $ 6 per gallon

Clancy's profit = $ 4500

Caroline's profit = $ 4500

Clancy implements his new plan:

The price of water decreases to $ 5 per gallon

Clancy's profit = 1000 x 5 = $ 5000

Caroline's profit = 750 x 5 = $ 3750

Caroline increases her production:

New price = $ 4 per gallon

Clancy's profit = 1000 x 4 = $ 4000

Caroline's profit = 1000 x 4 = $ 4000

Total profit = $ 8000

The behaviour is an example of tit for tat strategy

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