Scenario: There are two firms in an industry, Firm A and Firm B, and they consider entering into a colluding agreement. If the two firms collude, then they agree that they would both produce less than what they would if they were competing against each other in an oligopolistic market. Since Firm A expects Firm B to produce a small quantity of output in the colloding agreement, Firm A is facing a demand curve with the same slope but with a higher intercept. The following figure depicts demands that face Firm A in both the colluding agreement and the oligopolistic market.

-Refer to the figure above.What is the profit that Firm A can get by cheating on the collusive agreement?

Question

Scenario: There are two firms in an industry, Firm A and Firm B, and they consider entering into a colluding agreement. If the two firms collude, then they agree that they would both produce less than what they would if they were competing against each other in an oligopolistic market. Since Firm A expects Firm B to produce a small quantity of output in the colloding agreement, Firm A is facing a demand curve with the same slope but with a higher intercept. The following figure depicts demands that face Firm A in both the colluding agreement and the oligopolistic market.
 
-Refer to the figure above.What is the profit that Firm A can get by cheating on the collusive agreement?

Quizplus · Accepted Answer

The profit Firm A can get by cheating on the collusive agreement is $9, as this is typically the increased profit from undercutting the agreed price in a collusive setup.

Scenario: There Are Two Firms in an Industry, Firm a and Firm