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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

“Firms have an incentive to form a cartel, but once it is formed, they have an incentive to cheat.” What is the specific incentive to form the cartel? What is the incentive to cheat on the cartel?

To determine

Explain the specific incentive to form the cartel and the incentive to cheat on the cartel.

Explanation

Suppose, the firms have an incentive to form a cartel, but once it is formed, they have an incentive to cheat. The aim of the formation of a cartel is to maximize industrial profit. Therefore, the specific incentive to form the cartel is to maximize the profit.

Figure-1 shows the benefit of cheating on the cartel agreement as follows:

In Figure -1, the horizontal axis measures the quantity and the vertical axis measures the price...

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