What is the dilemma faced by firms in collusive agreement to restrict output and boost price?
What will be an ideal response?
Because there are just a few large firms in an oligopoly, output and pricing decisions made by one firm affect the demand for other firms' goods. To maximize the total joint profit, the firms must cooperate, act like a monopoly so as to restrict output and earn monopoly profits. Each firm, though, has an incentive to cheat on an agreement to restrict output because if it increases production it can (temporarily, at least) earn higher profits. But if all firms increase production, total profits will fall and the market will move toward the competitive equilibrium.
You might also like to view...
Taco Bell produces both tacos and burritos because when it does so, Taco Bell experiences
A) economies of scope. B) decreasing scope of costs. C) increasing normal profit. D) economies of scale.
If aggregate demand just decreased, which of the following may have caused the decrease?
A) a decrease in the price level B) a decrease in imports C) a decrease in the interest rate D) a decrease in exports