Question

Once a cartel has successfully achieved a price and output level similar to what would prevail in a monopolized market, some members have an incentive to cheat by:

Option 1: Lowering their prices
Option 2: Increasing their production
Option 3: Maintaining the status quo
Option 4: Seeking government intervention

Answer 1

In the scenario where a cartel has successfully achieved a price and output level similar to what would prevail in a monopolized market, some members have an incentive to cheat by Increasing their production. The correct option is Option 2: Increasing their production.

Step-by-step explanation:

Once a cartel establishes a coordinated effort to set prices and output levels, individual members may be tempted to deviate from the agreed-upon strategy to maximize their own profits. The incentive to cheat often manifests in the form of increased production by some cartel members. By producing more than their allocated share, these members aim to capture a larger market share and, consequently, higher profits. This strategic deviation undermines the cartel's collective efforts to maintain a monopolistic outcome and can lead to a breakdown in cooperation (option 2).

The logic behind this incentive to cheat is grounded in individual profit maximization. While cartel members benefit collectively from a monopolistic price and output level, each member has an individual incentive to increase production to capture a larger portion of the market. This behavior, known as "cheating," introduces an element of self-interest that conflicts with the cartel's cooperative agreement.

In summary, the incentive for cartel members to cheat by increasing production stems from the tension between individual profit motives and the collective goal of maintaining monopolistic market conditions. This phenomenon highlights the challenge of sustaining cooperation within a cartel and underscores the need for effective enforcement mechanisms to deter members from deviating from the agreed-upon strategy. The correct option is Option 2: Increasing their production.

Answer 2

In the scenario where a cartel has successfully achieved a price and output level similar to what would prevail in a monopolized market, some members have an incentive to cheat by Increasing their production (option 2).

Step-by-step explanation:

Once a cartel establishes a coordinated effort to set prices and output levels, individual members may be tempted to deviate from the agreed-upon strategy to maximize their own profits. The incentive to cheat often manifests in the form of increased production by some cartel members. By producing more than their allocated share, these members aim to capture a larger market share and, consequently, higher profits. This strategic deviation undermines the cartel's collective efforts to maintain a monopolistic outcome and can lead to a breakdown in cooperation (option 2).

The logic behind this incentive to cheat is grounded in individual profit maximization. While cartel members benefit collectively from a monopolistic price and output level, each member has an individual incentive to increase production to capture a larger portion of the market. This behavior, known as "cheating," introduces an element of self-interest that conflicts with the cartel's cooperative agreement.

In summary, the incentive for cartel members to cheat by increasing production stems from the tension between individual profit motives and the collective goal of maintaining monopolistic market conditions. This phenomenon highlights the challenge of sustaining cooperation within a cartel and underscores the need for effective enforcement mechanisms to deter members from deviating from the agreed-upon strategy.