Consider a town in which only two residents, Edison and Hilary, own wells that produce water safe for drinking. Edison and Hilary 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 Edison and Hilary 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, Edison and Hilary agree to split production equally. Therefore, Edison's profit is and Hilary's profit is Suppose Edison and Hilary 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, Edison and Hilary agree to split production equally. Therefore, Edison's profit is and Hilary's profit is Suppose that Edison and Hilary 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, Edison says to himself, "Hilary and I aren't the best of friends anyway. If I increase my production by 35 gallons, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Edison implements his new plan, the price of water to per gallon. Given Hilary and Edison's production levels, Edison's profit becomes and Hilary's profit becomes Because Edison has deviated from the cartel agreement and increased his output of water by 35 gallons, Hilary decides that she will also increase her production by 35 gallons. After Hilary increases her production, Edison's profit becomes , Hilary's profit becomes , and total profit (the sum of the profits of Edison and Hilary) is now Note that Edison and Hilary started by behaving cooperatively. However, once Edison decided to cheat, Hilary decided to cheat as well. In other words, Hilary's output decisions are based on Edison's actions. This behavior is an example of.

1. Consider a town in which only two residents, Edison and Hilary, own wells that produce water
safe for drinking. Edison and Hilary 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 Edison and Hilary 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,
Edison and Hilary agree to split production equally. Therefore, Edison's profit is and Hilary's
profit is
Suppose Edison and Hilary 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, Edison and
Hilary agree to split production equally. Therefore, Edison's profit is and Hilary's profit is
Suppose that Edison and Hilary 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,
Edison says to himself, "Hilary and I aren't the best of friends anyway. If I increase my
production by 35 gallons, I can increase my profit even though her profit goes down. I will do
that starting tomorrow." After Edison implements his new plan, the price of water to per gallon.
Given Hilary and Edison's production levels, Edison's profit becomes and Hilary's profit
becomes Because Edison has deviated from the cartel agreement and increased his output of
water by 35 gallons, Hilary decides that she will also increase her production by 35 gallons.
After Hilary increases her production, Edison's profit becomes , Hilary's profit becomes , and
total profit (the sum of the profits of Edison and Hilary) is now Note that Edison and Hilary
started by behaving cooperatively. However, once Edison decided to cheat, Hilary decided to
cheat as well. In other words, Hilary's output decisions are based on Edison's actions. This
behavior is an example of