Mexico and OPEC both produce crude oil.Realizing that it would be in their best interest to form an agreement on production goals,a meeting is arranged and an informal,verbal agreement is reached.If both Mexico and OPEC stick to the agreement,OPEC will earn profit of $200 million and Mexico will earn profit of $100 million.If both Mexico and OPEC cheat,then OPEC will earn $175 million and Mexico will earn $80 million.If only OPEC cheats,then OPEC earns $185 million and Mexico $60 million.If only Mexico cheats,then Mexico earns $110 million and OPEC $150 million.
-The distinguishing feature of a cartel is
A) two firms are involved.
B) firms agree to restrict output to earn higher profit.
C) inelastic consumer demand.
D) a formal,written document.
E) firms agree to restrict membership in the cartel.

Question

Mexico and OPEC both produce crude oil.Realizing that it would be in their best interest to form an agreement on production goals,a meeting is arranged and an informal,verbal agreement is reached.If both Mexico and OPEC stick to the agreement,OPEC will earn profit of $200 million and Mexico will earn profit of $100 million.If both Mexico and OPEC cheat,then OPEC will earn $175 million and Mexico will earn $80 million.If only OPEC cheats,then OPEC earns $185 million and Mexico $60 million.If only Mexico cheats,then Mexico earns $110 million and OPEC $150 million. 
-The distinguishing feature of a cartel is
A) two firms are involved. 
B) firms agree to restrict output to earn higher profit. 
C) inelastic consumer demand. 
D) a formal,written document. 
E) firms agree to restrict membership in the cartel.

Quizplus · Accepted Answer

The distinguishing feature of a cartel is that firms agree to restrict output to earn higher profit. This is exactly what Mexico and OPEC have done in the scenario described, reaching an informal, verbal agreement on production goals.

Mexico and OPEC Both Produce Crude Oil