The following figure shows the market demand curve [DD'],the supply curve of the fringe firms [S F ],the cartel's marginal cost curve [MC 0 ],and the cartel's marginal revenue curve [MR 0 ].Assume that the cartel behaves like a dominant firm.
-Refer to Figure 13-2.On the AD' portion of the demand curve _____.
A)the cartel and fringe firms will produce equal quantities of output
B)only the fringe firms will produce output
C)the demand curve is more elastic
D)only the cartel acting as a dominant firm will produce output

Question

The following figure shows the market demand curve [DD'],the supply curve of the fringe firms [S F ],the cartel's marginal cost curve [MC 0 ],and the cartel's marginal revenue curve [MR 0 ].Assume that the cartel behaves like a dominant firm. 
-Refer to Figure 13-2.On the AD' portion of the demand curve _____.
A)the cartel and fringe firms will produce equal quantities of output 
B)only the fringe firms will produce output 
C)the demand curve is more elastic 
D)only the cartel acting as a dominant firm will produce output

Quizplus · Accepted Answer

On the AD' portion of the demand curve, the cartel acting as a dominant firm will be the only producer of output. This is because the cartel can limit output and charge a higher price than the competitive fringe firms. The demand curve is less elastic in this portion, which allows the cartel to exercise its market power without losing too many customers to the fringe firms.

The Following Figure Shows the Market Demand Curve [DD'],the Supply