Consider a town in which only two residents, Kenji and Lucia, own wells that produce water safe for drinking. Kenji and Lucia 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. Price (Dollars per gallon) 4.20 3.85 3.50 3.15 2.80 2.45 2.10 1.75 1.40 1.05 0.70 0.35 0 Quantity Demanded (Gallons of water) 0 30 60 90 120 150 180 210 240 270 300 330 360 Total Revenue (Dollars) 0 116 210 284 336 368 378 368 336 284 210 116 0 Suppose Kenji and Lucia form a cartel and behave as a monopolist. The profit-maximizing price is $ per gallon, and the total output gallons. As part of their cartel agreement, Kenji and Lucia agree to split production equally. Therefore, Kenji's profit is $ and Lucia's profit is $ is Suppose that Kenji and Lucia 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, Kenji says to himself, "Lucia and I aren't the best of friends anyway. If I increase my production to 30 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." to $ After Kenji implements his new plan, the price of water Kenji's profit becomes $ and Lucia's profit becomes $ per gallon. Given Lucia and Kenji's production levels, Because Kenji has deviated from the cartel agreement and increased his output of water to 30 gallons more than the cartel amount, Lucia decides that she will also increase her production to 30 gallons more than the cartel amount. After Lucia increases her production, Kenji's profit becomes $ of the profits of Kenji and Lucia) is now $ , Lucia's profit becomes and total profit (the sum Kenji and Lucia have each cheated on their cartel agreement and increased production by 30 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Kenji's profit when he produces 60 gallons more than the cartel amount compared to his profit when he produces 30 gallons more than the cartel amount.) Neither Kenji nor Lucia has an incentive to increase output further, nor does either have an incentive to decrease output. This outcome is an example of