(Solved): Consider a town in which only two residents, Isaiah and Dalia, own wells that produce water safe f ...

Consider a town in which only two residents, Isaiah and Dalia, 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. 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 Suppose 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. If I 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 to per gallon. Given Dalia and Isaiah's production levels, Isaiah's profit becomes and Dalia's profit becomes Because Isaiah has deviated from the cartel agreement and increased 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 than the cartel amount. 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. True False Note that Isaiah and Dalia started by behaving cooperatively. However, once Isaiah decided to cheat, Dalia decided to cheat as well. In other words, Dalia's output decisions are based on Isaiah's actions. This behavior is an example of