In France, the market for bottled water is controlled by two large firms, Perrier and Evian. Each firm has a fixed cost of $1,000,000 and a constant marginal cost of $2 per liter of bottled water. The following table gives the market demand schedule for bottled water in France.
Price of bottled water per liter Quantity of bottled water demanded (millions of liters)
10 0
9 1
8 2
7 3
6 4
5 5
4 6
3 7
2 8
1 9
a. Suppose the two firms form a cartel and act as a monopolist. Calculate marginal revenue for the cartel. What will the monopoly price and output be? Assuming the output is divided evenly, how much each firm will produce and what will each firm's profit be?
b. Now suppose Perrier decides to increase production by 1 million liters more than what it currently produces. Evian doesn't change its production. What will the new market price and output be? What is Perrier's profit now? Evian's?
c. What if Perrier increases production by 3 million more liters from the level you found in part (a)? Evian doesn't change its production. What will happen to each firm's profit?