Final answer:
Cheating in a cartel is more likely to occur in an industry with a large number of firms because it makes it harder to monitor and enforce collusion agreements, leading to individual firms potentially increasing output for their own benefit despite the cartel agreement. Thus, the correct option for when cheating in a cartel is more likely is b. 'has a large number of firms.'
Step-by-step explanation:
When considering factors that make cheating in a cartel more likely to occur, option b. 'has a large number of firms' is the most conducive environment for such behavior.
Cartels, which are formed to maximize profits by acting like a monopolist (reducing output and raising price), can face challenges as firms within might benefit from expanding output individually. The possibility of collusion breaking down is higher in an industry with a large number of firms because it becomes more difficult to monitor and enforce the agreement among more participants. This monitoring becomes particularly challenging when each firm can benefit from cheating on the cartel agreement, especially when such collusion is illegal. Therefore, the mentioned correct option in the final answer is b. 'has a large number of firms.'
Additionally, if the cartel were to collapse, the industry would shift towards more aggressive competition, leading to a decrease in prices and increase in output, which ultimately decreases the collective profits of all firms within the industry.