Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other's. The industry is a natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market equally.
-In the scenario above, which of the following actions will maximize the industry's economic profit?
A) Both firms comply with the agreement.
B) Both firms cheat on the agreement, producing more than the agreed amount.
C) One of the firms complies with the agreement while the other firm cheats, producing more than the agreed amount.
D) Because the firms are colluding, the profit does not change regardless of whether the firms comply with agreement or cheat on the agreement.

Question

Quizplus · Accepted Answer

When both firms comply with the agreement, they can maintain higher prices and maximize joint profits, as producing more would lead to a price war and reduced profits.

Suppose Two Firms, FastNet and SmartCast Are the Only Fast