Consider a town in which only two residents, Daniel and Gabrielle, own wells that produce water safe for drinking. Daniel and Gabrielle 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 Daniel and Gabrielle 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, Daniel and Gabrielle agree to split production equally. Therefore, Daniel's profit is

$,$ and Gabrielle's profit is

Suppose that Daniel and Gabrielle 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, Daniel says to himself, "Gabrielle and I aren't the best of friends anyway. If I increase my production to

$50$ gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Daniel implements his new plan, the price of water decreases $$ to ler gallon. Given Gabrielle and Daniel's production

levels, Daniel's profit becomes

and Gabrielle's profit becomes

Because Daniel has deviated from the cartel agreement and increased his output of water to $50$ gallons more than the cartel amount, Gabrielle decides

that she will also increase her production to $50$ gallons more than the cartel amount.

After Gabrielle increases her production, Daniel's profit becomes

$,$ Gabrielle's profit becomes

$,$ and total profit

$($the sum of the profits of Daniel and Gabrielle$)$ is now

True or False: Based on the fact that both Daniel and Gabrielle increased production from the initial cartel quantity, you know that the output effect

was larger than the price effect at that quantity.