The tendency of automobile dea-lers to cluster is an example of self-reinforcing changes that lead to extremeoutcomes. Consider a city with three isolated automobile dealers, each ofwhich has three buyers per day. The profit per car sold is$1, 000. A two-dealer cluster would get six times as many buyers (18), and a three-dealercluster would get 12 times as many buyers (36).

(a)Graph the profit gap (the profit for a firm in a cluster minus the profitfor an isolated firm) for one, two, and three dealers (x-axis: number ofdealers, y-axis: profit gap).

(b)If initially all dealers are isolated and then one joins another to form atwo-dealer cluster, other firms [will, won’t] have an incentive to join thecluster because...