Question

Price	Quantity Demanded	Total Revenue
(Dollars per gallon)	(Gallons of water)	(Dollars)
4.80	0	0
4.40	45	$198.00
4.00	90	$360.00
3.60	135	$486.00
3.20	180	$576.00
2.80	225	$630.00
2.40	270	$648.00
2.00	315	$630.00
1.60	360	$576.00
1.20	405	$486.00
0.80	450	$360.00
0.40	495	$198.00
0	540	0

Suppose Jacques and Kyoko 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, Jacques and Kyoko agree to split production equally. Therefore, Jacques's profit is_________, and Kyoko's profit is_________.

Suppose that Jacques and Kyoko 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, Jacques says to himself, "Kyoko and I aren't the best of friends anyway. If I increase my production to 45 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Jacques implements his new plan, the price of water(decreases/ increases) to_______ per gallon. Given Kyoko and Jacques's production levels, Jacques's profit becomes_________ and Kyoko's profit becomes____________.

Because Jacques has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Kyoko decides that she will also increase her production to 45 gallons more than the cartel amount.

After Kyoko increases her production, Jacques's profit becomes___________, Kyoko's profit becomes_________, and total profit (the sum of the profits of Jacques and Kyoko) is now_____________.

True or False: Based on the fact that both Jacques and Kyoko increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity.

-True

-False

Jacques and Kyoko have each cheated on their cartel agreement and increased production by 45 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Jacques's profit when he produces 90 gallons more than the cartel amount compared to his profit when he produces 45 gallons more than the cartel amount.)

Neither Jacques nor Kyoko has an incentive to further increase output, nor does either have an incentive to decrease output. This outcome is an example of _____________ .