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Question
Microeconomics
Posted 9 months ago
Charlie's Cappuccinos, Melia's Mocha, and Jared's Java have agreed to collude and act like a monopoly by setting a price of per cup of coffee.
What is the most likely outcome?
Choose 1 answer:
(A) At least one firm will violate the agreement and lower its price
(B) Industry profits will stay the same in the long run
(C) Industry profits will be higher in the long run
(D) At least one firm will exit the industry
(E) At least one firm will violate the agreement and raise its price
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Answer from Sia
Posted 9 months ago
Solution
a
Collusion and Incentives: When firms collude to set a price, they act like a monopoly to maximize joint profits. However, each firm has an incentive to cheat by lowering its price to capture a larger market share
b
Likelihood of Cheating: Given the incentive to cheat, it is likely that at least one firm will violate the agreement and lower its price to attract more customers. This is because the short-term gain from attracting more customers can outweigh the long-term benefits of maintaining the collusion
Answer
(A) At least one firm will violate the agreement and lower its price
Key Concept
Collusion and Incentives
Explanation
In a collusive agreement, firms have an incentive to cheat by lowering prices to increase their market share, making it likely that at least one firm will violate the agreement.
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