Question

Suppose that the four firms are colluding by acting like a monopolist, with each firm producing one-fourth of the market output. If one of the firms cheats on the cartel agreement and produces an additional unit of output, the profits of each of the compliant firms go from:

Answer 1

When a firm cheats on a cartel agreement and increases output, it negatively affects the profits of the other compliant firms.

Step-by-step explanation:

When one of the firms in a cartel cheats on the agreement and produces an additional unit of output, the profits of each of the compliant firms will decrease. This is because the total market output increases, leading to a decrease in market price. As a result, the compliant firms will earn lower profits.

For example, let's say the cartel agreement was to produce equal amounts of output, resulting in a monopoly-like situation and higher prices. If one firm decides to cheat and produces more output, this increases the total market supply and lowers the price. As a result, the compliant firms will see a decrease in their profits.

Therefore, when a firm cheats on a cartel agreement and increases output, it negatively affects the profits of the other compliant firms.

Answer 2

Complete Question

The complete question is shown on the first uploaded image

Answer:

the correct answer is (b) decrease from $16 to $14

Step-by-step explanation:

In order for profit to be maximized by a monopolist quantity produce will be MR = MC

from above graph MR = MC when Quantity = 8. As they are all producing equal portion of market output Hence Each firm will produce Q = 8/4 = 2 units.

When Market quantity = 8 then price they are getting = 12 per unit (From demand curve)

As there is no fixed cost and MC is constant => Total variable cost = MC*Q = 4Q

=> Total cost(TC) = Total fixed cost + total Variable cost = 0 + 4Q = 4Q

Total revenue = Price * quantity = PQ = 12Q

Hence Profit = 12Q - 4Q = 8Q and as Q = quantity per firm = 2

=> Profit they are earning = 8*2 = 16.

Now Suppose one firm cheats and hence now total quantity produces and sold = 2*3 + 3 + 9.

When Market quantity = 9 then price they are getting = 11 per unit (From demand curve).

Now, Profit = TR - TC = 11Q - 4Q = 7Q and Q remains same for those firms who didn't cheat.

So, Now profit = 7Q = 7*2 = 14.

Thus, If one of the firms cheats on the cartel agreement and produces an additional unit of output, the profits of each of the non cheating firms will decrease from $16 to $14.