Question

Suppose that Bieber and Rihanna are duopolists in the music industry. In May, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By June, each singer is considering breaking the agreement. What would you expect to happen next?

A. Bieber and Rihanna will determine that it is in each singer's self interest to maintain the agreement.

B. Bieber and Rihanna will each break the agreement. Both singers' profits will decrease.

C. Bieber and Rihanna will each break the agreement. Both singers' profits will increase.

D. Bieber and Rihanna will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.

Answer 1

If Bieber and Rihanna consider breaking their monopolist agreement, they are likely to both break the agreement, entering a prisoner's dilemma scenario. This leads to increased output and reduced profits for both singers, as they lose monopoly power and revert to competing against each other.

Step-by-step explanation:

Given the situation where Bieber and Rihanna are acting as a cartel in the music industry, if they each consider breaking the agreement in June, the most likely scenario would be that they will both break the agreement. This situation mirrors a prisoner’s dilemma, where each firm (or singer, in this case), has an incentive to expand output regardless of the other’s decision because it leads to individually higher profits at that moment.

If one holds down the output while the other expands, the one who holds output loses potential revenue. If both expand output, they both earn less than if they had cooperated but more than if one had maintained the agreement while the other cheated. Thus, the new equilibrium would have increased quantity and a lower price, effectively dissipating the monopoly power and reducing the combined profits they could have earned by sticking to the agreement. Therefore, the correct answer to what would happen next is:

B. Bieber and Rihanna will each break the agreement. Both singers' profits will decrease.

Answer 2

The correct answer is B. Bieber and Rihanna will each break the agreement. Both singers' profits will decrease.

Step-by-step explanation:

Most likely, their earnings will decrease, because they will have to do their job independently. In the same way, the public will not hire or accept them in the same way as before. You need to get used to this new decision in order to have a better approval.