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Answer :

As I drop down the answers in the blanks with

respectively numbers.

(1) :- Profit maximizing price = 2.70 because

total revenue or profit is highest at this price.

240 gallons

Total profit = $ 648

So, each firm's profit = 648/2 = $ 324

Felix's profit = $ 324

Janet's profit = $ 324

 When production increases by 40 units then the price of water
decreases to $ 2.25 per gallon.
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• Suppose Felix and Janet form a cartel and behave as a
monopolist. The profit-maximizing price is $2.70
per gallon, and
the total output is 240 gallons. As part of their
cartel agreement, Felix and Janet agree to
split production
equally. Therefore, Felix's profit is $324 and Janet's profit
is $324.

(2) :- When production increases by 40 units

then the price of water decreases to $2.25 per gallon.

Felix's new profit = (240/2 + 40units) X $ 2.25 = $ 360

Janet's new profit = (240/2) X $ 2.25 = $ 270

• After Felix implements his new plan, the price of water

DECREASES to $1.80 per gallon. Given Janet
and
Felix's production levels, Felix's profit becomes
$360 and Janet's profit
becomes $270.

(3) :- When Janet also increases production by

40 units then price of water again decreases and reaches at
$ 1.80
per gallon.

Felix's profit = 320/2 X 1.80 = $288

Janet's profit = 320/2 X 1.80 = $288

Total profit = $288 + $288 = $576

After Janet increases her production, Felix's profit becomes

$288  Janet's
profit becomes $288 and total
profit (the
sum of the profits of Felix and Janet) is now $576.

(4) :- True or
False: Based on the fact that both Felix and Janet increased
production from the initial cartel
quantity, you know that the
output effect was larger than the price effect at that
quantity.

The given statement is False.

(5) :- Note that Felix and Janet started by

behaving cooperatively. However, once Felix decided to cheat,
Janet
decided to cheat as well. In other words, Janet's output decisions
are based on Felix's actions.

This behavior is an example of TIT FOR TAT

STRATEGY

Explanation :

Tit for Tat strategy means both player cooperate at the first
play; then, on subsequent plays, do the same
action the other
player choose on the immediately previous play.

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Q: 3. Breakdown of a cartel agreement Consider a town in which only two residents, Felix and Janet, own wells that
produce water safe for drinking. Felix and Janet can pump and sell as much water as they want at no cost. For them,
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Q: Breakdown
of a cartel agreement Consider a town in which only two residents,
Felix and Janet, own wells that
produce water safe for drinking.
Felix and Janet 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.

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produce water safe for drinking. Felix and Janet can pump and sell as much water as they want at no cost. For them,
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