There exists an incentive to cheat on a collusive agreement as long as
A)price equals marginal cost.
B)price equals marginal revenue.
C)price exceeds marginal cost.
D)price is above minimum average total cost.
E)none of the above.

Question

Quizplus · Accepted Answer

In a collusive agreement, firms agree to restrict output and raise prices above the competitive level. If the price is above marginal cost, firms have an incentive to increase output and earn higher profits by breaking the agreement. This behavior is rational because firms can increase their profits by producing more and selling at a higher price since they will gain a larger share of the profits by producing more. Thus, the answer is C since cheating on a collusive agreement makes economic sense only if prices exceed marginal costs.

There Exists an Incentive to Cheat on a Collusive Agreement