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Consider a town in which only two residents, Khalid and Sabrina, own wells that produce water safe for drinking. Khalid and Sabrina 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 Khalid and Sabrina 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, Khalid and Sabrina agree to spilt production equally. Therefore, Khalid's profit is , and Sabrina's proft is Suppose Khalld and Sabrina form a cartel and behave as a monopolist. The profit-maximizing price is per galion, and the total. output is galions. As part of their cartel agreement, Khalid and Sabrina agree to split production equally, Therefore, Khalid's profit is and Sabrina's profit is Suppose that Khalid and Sabrina 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, Khalid says to himself, "Sabrina 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 Khalid implements his n A plan, the price of water to ger gallon. Given Sabrina and Khalld's production levels, Khalid's profit becomes and Sabrina's profit becomes Because Khalid has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Sabrina decides that she will also increase her production to 45 galions more than the cartel amount. After Sabrina increases her production, Khalid's profit becomes , Sabrina's profit becomes , and total profit (the sum of the profits of Khalid and Sabrina) is now True or False: Based on the fact that both Khatid and Sabrina increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity. True False Note that Khalid and Sabrina started by behaving cooperatively. However, once Khalid decided to cheat, Sabrina decided to cheat as well, In other words, Sabrina's output decisions are based on Khalid's actions. Note that Khalid and Sabrina started by behaving cooperatively. However, once Khalid decided to cheat, Sabrina decided to cheat as well. In other words, Sabrina's output decisions are based on Khalid's actions. This behavior is an example of

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