3. Breakdown of a cartel agreement Consider a town in which only two tesidents, Isaiah and Dalia, own wells that produce water safe for drinking. Isaiah and Dalia can pump and seil 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 Isaiah and Dalia 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, Isaiah and Dalia agree to split production equaliy. Therefore, Isaiah's profit is and Dalia's profit is Suppose that isalah and Dalia 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, Isaiah says to himself, "Dalla and 1 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 Isaiah implements his new plan, the price of water to per gallon. Given Dalia and Isaiah's production levels, Isalah's profit becomes and Dalia's profit becomes Because isalah has deviated from the cartel agreement and increased his outpuld of water to 35 gallons more than the cartel amount, Dalia decides that stie will also increase her production to 35 gallons more than the cartel amount. After Dalia increases her production, Isaiah's profit becomes Dalia's profit becomes the profits of Isalah and Dalia) is now True or False: Based on the fact that both Isaiah and Dalia increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity. True False Suppose isaiah and Dalia form a cartel and behave as a monopolist, The profit-maximizing price is per gallon, and the total output is gailons. As part of their cartel agreement, Isaiah and Dalia agree to spit production equally. Therefore, Isaiah's profit is and Dalia's profit is Suppose that Isalah and Dalia 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, tsalah says to himself, "Dalia and 1 aren't the best of friends anyway. If 1 increase my production to 35 galions more than the cartel amount, 1 can increase my profit even though her profit goes down. 1 will do that starting tomorrow.. After Isalah implements his new plan, the price of water to per gation. Given Datia and Isaiah's production levels, Tsaiak's profit becomes Because Isalah has deviated from the cartel agreement his output of water to 35 gallons more than the cartel amount, Dalia decides that she will aiso increase her production to 35 gallons r cartel amount. After Dalia increases her production, Isalah's proft becomes , Dalia's proht becomes the profits of Isalah and Dalia) is now Thue of False: Based on the fact that both Isaiah and Dalia increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity. True False Isaiah and Dalia have each cheated on their 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'll each suffer a decrease in profit. (To see this for yourself, consider Isaiah'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.) Neither isaiah nor Dalia has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of . ated on their cartel agreement and increased production by 35 gallons more than the cartel amount. However, they ie to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider is 70 gallons more than the cartel amount compared to his profit when he produces 35 gallons more than the cartel incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example