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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.

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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 equally. Therefore, Isaiah's profit is $ , and Dalia's profit is $3. Breakdown of a cartel agreement Consider a town in which only two residents, Isaiah and Daiia, own wells that produce water safe for drinking. Isaiah and Dalia 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. After Dalia increases her production, Isaiah's profit becomes | $ Dalia's profit becomes $ and total profit (the sum of the profits of Isaiah 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 larger than the price effect at that quantity. O True O FalseSuppose that Isaiah 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, "Dalia and I aren't the best of friends anyway. IfI increase my production to 45 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 '7 to per gallon. Given Dalia and Isaiah's production levels, Isaiah's prot becomes and Dalia's profit becomes . a Nash equilibrium ated on their cartel agreement and increased production by 45 gallons more than the cartel amount. However, they e to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider resale price maintenance -s 90 gallons more than the cartel amount compared to his prot when he produces 45 gallons more than the cartel predatory pricing tying incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of V. Isaiah and Dalia have each cheated on their cartel agreement and increased production by 45 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 90 gallons more than the cartel amount compared to his profit when he produces 45 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 Y. After Isaiah implements his new plan, the price of water to $ per gallon. Given Dalia and Isaiah's production levels, Isaiah's profit becomes $ and Dalia's p $ decreases Because Isaiah has deviated from the cartel agreement a increases his output of water to 45 gallons more than the cartel amount, Dalia decides that she will also increase her production to 45 gallons more can the cartel amount.Price Quantity Demanded Total Revenue (Dollars per gallon) (Gallons of water) (Dollars) 5.40 0 0 4.95 45 $222.75 4.50 90 $405.00 4.05 135 $546.75 3.60 180 $648.00 3.15 225 $708.75 2.70 270 $729.00 2.25 315 $708.75 1.80 360 $648.00 1.35 405 $546.75 0.90 450 $405.00 0.45 495 $222.75 0 540 0

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