The table below shows the payoff (profit) matrix of Firm A and Firm B indicating the profit outcome that corresponds to each firm's pricing strategy (where $500 and $200 are the pricing strategies of two firms).Table 12.2

-When firms in an illegal market form a cartel, _____.
A)they are able to supply higher quality products
B)it becomes more difficult for police to detect their activities
C)they are able to increase profits by behaving as a monopolist
D)they face a deadweight loss
E)they rely on goodwill to ensure the stability of the cartel

Question

The table below shows the payoff (profit) matrix of Firm A and Firm B indicating the profit outcome that corresponds to each firm's pricing strategy (where $500 and $200 are the pricing strategies of two firms).Table 12.2
 
-When firms in an illegal market form a cartel, _____.
A)they are able to supply higher quality products 
B)it becomes more difficult for police to detect their activities 
C)they are able to increase profits by behaving as a monopolist 
D)they face a deadweight loss 
E)they rely on goodwill to ensure the stability of the cartel

Quizplus · Accepted Answer

When firms in an illegal market form a cartel, they are able to increase profits by behaving as a monopolist. By colluding on prices, they are able to restrict output and charge higher prices, leading to higher profits for each firm involved in the cartel. However, cartels in illegal markets are often unstable and can face significant risks, such as the threat of prosecution and the temptation to cheat on the agreed-upon prices.

The Table Below Shows the Payoff (Profit) Matrix of Firm