After Gregor implements his new plan, the price of water \( \qquad \) to \( \qquad \) \( \$ 1.60 \) per gallon. Given Haidy and Gregor's production levels, Gregor's profit becomes \( \qquad \) \( \$ 257.60 \) and Haidy's profit becomes \( \qquad \) \( \$ 201.60 \). Because Gregor has deviated from the cartel agreement and increased his output of water to 35 gallons more than the cartel amount, Haidy decides that she will also increase her production to 35 gallons more than the cartel amount. After Haidy increases her production, Gregor's profit becomes \( \$ \) \( \qquad \) , Haidy's profit becomes \( \qquad \) , and total profit (the sum of the profits of Gregor and Haidy) is now \$ \( \qquad \) .
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The Deep Dive
It's fascinating to look at how small changes in production levels and pricing strategies can significantly impact profits! In oligopolistic markets, like the water supply scenario with Gregor and Haidy, firms must navigate a delicate balance between collaboration and competition. When one member deviates from agreed production levels, it can lead to a ripple effect, prompting others to adjust their strategies, usually leading to decreased profits for all parties involved. This scenario is a classic example of the "prisoner's dilemma" in economics, where individual decision-making can lead to suboptimal outcomes for everyone involved. To avoid such pitfalls, it's crucial for firms in similar situations to maintain strong communication and trust among each other to reinforce cooperation and ensure collective profitability, rather than spiraling into competitive ruin.