Two firms,Alpha and Beta,produce identical computer hard drives.They have identical costs,and the hard drives they produce are identical.The industry is a natural duopoly.Alpha and Beta enter into a collusive agreement,according to which they split the market equally.If both firms cheat on the agreement so the market is the same as a competitive market,
A)each firm makes zero economic profit in the long run.
B)each firm makes the monopoly profit.
C)the oligopoly will produce fewer hard drives than a profit-maximizing monopoly would produce.
D)the oligopoly will produce the same number of hard drives as a profit-maximizing monopoly would produce.
E)each firm incurs an economic loss and exits the market in the long run.

Question

Quizplus · Accepted Answer

In a competitive market, firms typically earn zero economic profit in the long run because of free entry and exit. When both firms cheat on a collusive agreement, they act more competitively, driving down prices and profits to the point where only normal profits (zero economic profit) are made.

Two Firms,Alpha and Beta,produce Identical Computer Hard Drives