Final answer:
The statement from The Pepulator Case is false because, in practice, firms often find themselves in a prisoner's dilemma where mutual mistrust leads to decisions that do not maximize combined profits.
Step-by-step explanation:
The statement from The Pepulator Case posits that firms can maximize profits by cooperating with each other, as long as the other party continues to cooperate. However, this is not necessarily true in practice due to the prisoner's dilemma scenario that often unfolds. In such cases, even though firms A and B could make the highest combined profits by cooperating and producing a lower level of output, they may not trust each other. If firm A suspects firm B will increase output, firm A will do the same to avoid making lower profits.
Firms often face the temptation to defect from the agreement because if one firm holds down output while the other expands, the expanding firm earns higher profits, such as $1,500 compared to $400 if both expand their output. This lack of trust leads to a situation where both firms might end up increasing output independently and earn only $400 each, rather than maximizing possible profits through cooperation.