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.
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 ______
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.
$437.50
If one cheats they will get sell 350 gallons at the new market price of $1.25 (now a total qty of 250+350=600). $1.25*350=$437.50
$350
If Waterland also reneges and produces 350, market qty supplied is now 700 and price is $1. Each firm earns profit of $350 ($1*350). This is better for waterland than before since they were selling the 250 gallons at $1.25 (Profit = 250*1.25=312.50)