Suppose all of the firms in an industry form a cartel and succeed in raising the price to the monopoly level by reducing output.Any single firm will find that it can increase its profits by cheating on the cartel agreement.False

Question

Quizplus · Accepted Answer

If all firms in the industry form a cartel, they have agreed to work together to limit output and raise prices. If one firm decides to cheat and increase its output, it may temporarily increase its profits, but this will cause the price to fall and the other firms in the cartel may retaliate by also increasing output or lowering their prices. Ultimately, the cheating firm will not be able to sustain its higher profits and the cartel may dissolve. Therefore, it is not true that a single firm can increase its profits by cheating on the cartel agreement.

Suppose All of the Firms in an Industry Form a Cartel