3. Breakdown of a cartel agreement Consider a town in which only two residents, Sean and Yvette, own wells that produce water safe for drinking. Sean and Yvette 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) 4.20 3.85 3.50 3.15 2.80 2.45 2.10 1.75 1.40 1.05 0.70 0.35 0 Quantity Demanded (Gallons of water) 0 40 80 120 160 200 240 280 320 360 400 O True 440 False 480 Suppose Sean and Yvette form a cartel and behave as a monopolist. The profit-maximizing price is $ is per gallon, and the total output gallons. As part of their cartel agreement, Sean and Yvette agree to split production equally. Therefore, Sean's profit is $ and Yvette's profit is $ After Sean implements his new plan, the price of water Sean's profit becomes $ Suppose that Sean and Yvette 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, Sean says to himself, "Yvette and I aren't the best of friends anyway. If I increase my production to 40 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." This behavior is an example of Total Revenue (Dollars) 0 $154.00 $280.00 $378.00 $448.00 $490.00 $504.00 $490.00 $448.00 $378.00 $280.00 $154.00 0 Because Sean has deviated from the cartel agreement and increased his output of water to 40 gallons more than the cartel amount, Yvette decides that she will also increase her production to 40 gallons more than the cartel amount. After Yvette increases her production, Sean's profit becomes $ of the profits of Sean and Yvette) is now $ to and Yvette's profit becomes $ per gallon. Given Yvette and Sean's production levels, True or False: Based on the fact that both Sean and Yvette increased production from the initial cartel antity, you know that the put effect was larger than the price effect at that quantity. Yvette's profit becomes $ , and total profit (the sum Note that Sean and Yvette started by behaving cooperatively. However, once Sean decided to cheat, Yvette decided to cheat as well. In other words, Yvette's output decisions are based on Sean's actions.