Question

The following table shows your neighorhood’s demand for drinking water. Assume that only two firms (Waterland and Aquataste) produce and sell water in this market. Each firm offers the same quality, no fixed costs are incurred in the production of water, and each firm’s marginal cost is constant and equal to $0 because both companies can pump as much water as needed without cost. Because marginal cost is constant and equal to $0, total revenue is equal to total profit.

Price (per gallon)	Quantity (gallons)	Total Revenue (TR)
$0.25	1000	$250.00
$0.50	900	$450.00
$0.75	800	$600.00
$1.00	700	$700.00
$1.25	600	$750.00
$1.50	500	$750.00
$1.75	400	$700.00
$2.00	300	$600.00
$2.25	200	$450.00
$2.50	100	$250.00
$2.75	0	$0.00

Assume Waterland and Aquataste make a nonbinding, informal agreement that each will produce 250 gallons of water, charge $1.50 per gallon, and evenly split the profit of $750.

1st attempt

Part 1   (0.5 point)

See Hint

If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would then increase from $375 to   $  . (Provide your answer to two decimal places.)

Part 2   (0.5 point)

If Aquataste reneges on the agreement and produces 350 gallons, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would increase to   $  , which is better than the $312.50 Waterland would earn by sticking with the agreement. (Provide your answer to two decimal places.)

Answer 1

Answer 2

1)

Total production = 600 gallons , price = $1.25

Waterland's profit = 350 x 1.25 = $437.5

2)

Total production = 700 gallons, price = $1

Waterland's profit = 350 x 1 = $350