Question

there are two producers of wagon wheels that together are the exclusive fighters to a large economy. The executives of those companies meet to set minimum prices and production levels, thereby ensuring that they each will make a higher profit than they would in a free-market. This is an example of ______

Answer 1

Two wagon wheel companies setting prices and production levels together to boost profits exemplify collusion, a practice that could lead to legal and political challenges due to its anti-competitive nature.

Step-by-step explanation:

When two producers of wagon wheels set minimum prices and production levels to ensure higher profits, this is an example of collusion. In a typical American market economy, prices are set through negotiations between buyers and sellers. However, when companies in an oligopoly like the producers of wagon wheels collaborate, they can set prices as if they were a monopoly, which can lead to higher than competitive prices and reduced outputs. Such practices may attract legal and political pressures because they can be unfair to consumers and are usually regulated by government antitrust laws to prevent such anti-competitive behavior.

The scenario where two producers of wagon wheels set minimum prices and production levels to enhance their profits exemplifies collusion. In an American market economy, prices are typically determined through negotiations between buyers and sellers. However, in an oligopoly, where a small number of firms dominate the market, collusion can occur. In this case, companies collude to set prices collectively, emulating a monopoly's market power. This coordinated effort often results in elevated prices and reduced outputs, disadvantaging consumers. To prevent such anti-competitive behavior, government antitrust laws regulate and monitor these practices, as collusion undermines the principles of fair competition and can lead to market distortions. Legal and political pressures are common consequences for firms engaged in collusion, emphasizing the importance of maintaining competitive markets for consumer welfare.

Answer 2

The practice of two producers setting minimum prices and production levels is known as collusion, which is an attempt by firms in an oligopoly to act like a monopoly and is usually illegal due to its anti-competitive effects.

Step-by-step explanation:

The situation described, where two producers of wagon wheels set minimum prices and production levels, is an example of collusion. In a competitive market economy, prices are typically determined through negotiations between buyers and sellers. However, sometimes in an oligopoly market structure, like the one described where only a few producers dominate the market, firms may attempt to circumvent the competition by cooperating with each other, effectively behaving like a monopoly.

This cooperation can lead to higher prices and restricted production compared to what would occur in a competitive market. The act of collusion is often illegal because it undermines free-market principles and consumer welfare. It can result in market outcomes that are unfair to consumers, with higher prices and less choice. Government intervention can sometimes counteract these effects by enforcing antitrust laws that prohibit such business practices. When left unchecked, collusion can lead to market failures, where resources are not allocated efficiently, and can harm consumer interests and overall economic welfare.