-Suppose the diagram shown above represents the demand curve and the marginal revenue curve for a profit-maximizing cartel with two rival firms of equal size and efficiency,each with zero marginal cost.The market price is currently set at $1.00,and each firm is given a quota to sell 500 bottles/day.Suppose that price-cutting activities are difficult to detect and that each firm believes that it can out-perform the other firm.Why does each firm have an incentive to lower its price? 1.Each firm has marginal revenue higher than marginal cost.
2)Each firm is trying to get out of the diminishing marginal returns situation.
3)Each firm can earn extra profit by lowering its price.
A) All of these are true.
B) Only 1 is true.
C) Only 2 is true.
D) Only 3 is true.
E) Only 1 and 3 are true.

Question

-Suppose the diagram shown above represents the demand curve and the marginal revenue curve for a profit-maximizing cartel with two rival firms of equal size and efficiency,each with zero marginal cost.The market price is currently set at $1.00,and each firm is given a quota to sell 500 bottles/day.Suppose that price-cutting activities are difficult to detect and that each firm believes that it can out-perform the other firm.Why does each firm have an incentive to lower its price? 1.Each firm has marginal revenue higher than marginal cost.
2)Each firm is trying to get out of the diminishing marginal returns situation.
3)Each firm can earn extra profit by lowering its price.
A) All of these are true. 
B) Only 1 is true. 
C) Only 2 is true. 
D) Only 3 is true. 
E) Only 1 and 3 are true.

Quizplus · Accepted Answer

Each firm has marginal revenue higher than marginal cost, and each firm can earn extra profit by lowering its price.

-Suppose the Diagram Shown Above Represents the Demand Curve and the Marginal