3. Breakdown of a cartel agreement Consider a town in which only two residents, James and Amber, own wells that produce water safe for drinking. James and Amber 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. Suppose James and Amber form a cartel and behave as a monopolist. The profit-maximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, James and Amber agree to split production equally. Therefore, James's profit is and Amber's profit is Suppose that James and Amber 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. James says to himself, "Amber and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After James implements his new plan, the price of water to per gallon. Given Amber and James's production levels, James's profit becomes becomes Because James has devlated from the cartel agreement his output of water to 35 gallons more than the cartel amount, Amber decides that she will atso increase her production to 35 gallons n. - cartel amount. After Amber increases her production, James's profit becomes . Amber's profit becomes and total profit cthe sum of the prorits of James and Amber) is now True or False: Based on the fact that both James and Amber increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity. True False James and Amber have each cheated on thelr cartel agreement and increased production by 35 gallons more than the cartel amount, However, they both realize that if they continue to increase output beyond this amount, they'l each suffer a decrease in profit. (To see this for yourself, consider James's profit when he produces 70 gallons more than the cartel amount compared to his profit when he produces 35 gallons more than the cartel amount.) James and their cartel agreement and increased production by 35 gallons more than the cartel amount. However, they both realize zase output beyond this amount, they'l each suffer a decrease in profit. (To see this for yourself, consider James's pre ons more than the cartel amount compared to his profit when he produces 35 gallons more than the cartel amount.) Neither Jan ve to increase output further, nor does either have an incentive to decrease output. This outcome is an example of