Consider a town in which only two residents, Charles and Dina, own wells that produce water safe for drinking. Charles and Dina 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. Price (Dollars per gallon) Quantity Demanded (Gallons of water) 0 Total Revenue (Dollars) 0 3.00 2.75 50 138 2.50 100 250 2.25 150 338 2.00 400 200 250 1.75 438 1.50 300 450 1.25 350 438 1.00 400 400 450 338 0.75 0.50 500 250 0.25 550 138 0 600 0 is Suppose Charles and Dina form a cartel and behave as a monopolist. The profit-maximizing price is 5 per gallon, and the total output gallons. As part of their cartel agreement, Charles and Dina agree to split production equally. Therefore, Charles's profits ], and Dina's profit is 5 Suppose that Charles and Dins 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. Charles says to himself, "Dine and I aren't the best of friends anyway. If increase my production to 50 gations more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Charles Implements his new plan, the price of water to 5 per gallon. Given Dina and Charles's production levels, Charles's profit becomes 5 and Dina's profit becomes Because Charles has deviated from the cartel agreement and increased his output of water to 50 gallons more than the cartel amount, Dina decides that she will also increase her production to 50 gallons more than the cartel amount After Dina Increases her production, Charles's profit becomes Dina's profit becomes s and total profit (the sum of the profits of Charles and Dina) is now Note that Charles and Dina started by behaving cooperatively. However, once Charles decided to cheat, Dina decided to cheat as well. In other words, Dina's output decisions are based on Charles's actions. This behavior is an example of