# Suppose the following table describes the water supply in a small town. For now, assume the costs of supplying the water are equal to zero. Quantity Price Total Revenue (gallons)

Suppose the following table describes the water supply in a small town. For now, assume the costs of supplying the water are equal to zero.

Quantity

Price

Total Revenue

(gallons)

(profits)

0

$120

$0

10

$110

1,100

20

$100

2,000

30

$90

2,700

40

$80

3,200

50

$70

3,500

60

$60

3,600

70

$50

3,500

80

$40

3,200

90

$30

2,700

100

$20

2,000

1 10

$10

1,100

120

$0

0

(a) If there was only one company producing the water, what would be the quantity of water this company would sell to the public?

(b) If this market was made of two companies, then how much water would these two companies should supply in order to maximize their profits?

(c) Yet, we will not expect the two companies to do what is best for them, since they will be lost in a Prisoner’s Dilemma situation. describe the dilemma each company faces by:

(i) Constructing a payoff matrix

(ii) Identifying the Nash equilibrium

(iii) Refer to your payoff matrix analysis to explain why this is a Prisoner’s Dilemma situation.

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