Exhibit 10-7 Two-Firm Payoff Matrix
-Assume costs are identical for the two firms in Exhibit 10-7. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Question

Exhibit 10-7 Two-Firm Payoff Matrix 
-Assume costs are identical for the two firms in Exhibit 10-7. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Quizplus · Accepted Answer

When both firms form a cartel and agree on their prices, they can maximize their joint profits by charging the monopoly price of $10. This is because if one firm charges a lower price, customers will switch to that firm, reducing the profits of both firms. If one firm charges a higher price, customers will switch to the other firm, again reducing the profits of both firms. Therefore, both firms have an incentive to charge the same high price and earn the monopoly profits.