The market for bagels contains two firms: BagelWorld (BW)and Bagels'R'Us (BRU).The owners of the two firms decide to fix the price of bagels.The table shows the total profits the firms will earn if they abide by the price setting agreement or if they cheat on the agreement. $\begin{array}{c}
\text { Bagel World }\
\text { Bagels'R'Us }
\begin{array}{|l|l|l|}
\hline & \text { Cheat } & \text { Abide } \
\hline \text { Cheat } & \text { BRU: } \$ 40 ; \text { BW: } \$ 40 & \text { BRU: } \$ 80 ; \text { BW: } \$ 0 \
\hline \text { Abide } & \text { BRU: } \$ 0 ; \text { BW: } \$ 80 & \text { BRU: } \$ 45 ; \text { BW: } \$ 45 \
\hline
\end{array}\end{array}$
Refer to the figure above.Suppose the firms agree to the following: if one firm cheats today,the other firm will cheat tomorrow,but if one firm abides today,the other will abide tomorrow.The likely effect of this agreement would be:

Question

The market for bagels contains two firms: BagelWorld (BW)and Bagels'R'Us (BRU).The owners of the two firms decide to fix the price of bagels.The table shows the total profits the firms will earn if they abide by the price setting agreement or if they cheat on the agreement. $\begin{array}{c}
\text { Bagel World }\
\text { Bagels'R'Us }
\begin{array}{|l|l|l|}
\hline  & \text { Cheat } & \text { Abide } \
\hline \text { Cheat } & \text { BRU: } \$ 40 ; \text { BW: } \$ 40 & \text { BRU: } \$ 80 ; \text { BW: } \$ 0 \
\hline \text { Abide } & \text { BRU: } \$ 0 ; \text { BW: } \$ 80 & \text { BRU: } \$ 45 ; \text { BW: } \$ 45 \
\hline
\end{array}\end{array}$
Refer to the figure above.Suppose the firms agree to the following: if one firm cheats today,the other firm will cheat tomorrow,but if one firm abides today,the other will abide tomorrow.The likely effect of this agreement would be:

Quizplus · Accepted Answer

If one firm cheats today, the other firm will cheat tomorrow. This means that if one firm breaks the agreement, the other firm will also break the agreement. This makes it more likely that both firms will abide by the agreement, as they know that if they cheat, the other firm will also cheat and they will both be worse off.

The Market for Bagels Contains Two Firms: BagelWorld (BW)and Bagels'R'Us