Once a cartel determines the profit-maximizing price,
A)all members of the cartel have a strong incentive to abide by the agreed-upon price.
B)each member will face the temptation to cheat on the cartel price to increase its sales and profit.
C)changes in the output of any member firms will have no impact on the market price.
D)entry into the industry of new firms will have no impact on the profit of the cartel.
E)entry into the industry of new firms will raise cartel profit as long as the new firms join the cartel.

Question

Quizplus · Accepted Answer

Once a cartel determines the profit-maximizing price, each member will face the temptation to cheat on the cartel price to increase its sales and profit. This is because if a member cheats and increases its output, it can sell more at the higher market price, earning more profit than if it had stuck to the cartel price. Therefore, cheating becomes an attractive option for individual firms, which leads to the breakdown of the cartel.

Once a Cartel Determines the Profit-Maximizing Price