Hot dog vendors on the beach fail to cooperate with one another on the quantity of hot dogs they should sell to earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like, (i)
The quantity of hot dogs supplied is closer to the socially optimal level.
(ii)
The price of hot dogs is closer to marginal cost.
(iii)
The hot dog market at the beach is less competitive.

Question

Quizplus · Accepted Answer

When hot dog vendors fail to cooperate with each other, they will each try to sell as many hot dogs as possible to earn more profit. This leads to an increase in the quantity of hot dogs supplied, eventually driving down the price. However, the increase in quantity supplied can potentially bring it closer to the socially optimal level. Moreover, the decrease in price of hot dogs due to intra-competition can bring it closer to its marginal cost of production. Therefore, the correct answer is (i) and (ii).

Hot Dog Vendors on the Beach Fail to Cooperate with One