Suppose that an industry consists of a two-firm cartel: Firm A and Firm B. Each firm agrees to produce and sell only 100 units of output per week. This level of output maximizes total industry profit. Which of the following is TRUE?
A) Firm B could increase its profits by producing and selling only 90 units of output per week.
B) Both firms could increase their profit by lowering their price and expanding output.
C) Firm A could increase its profit by producing and selling a little more than 100 units of output.
D) Firm B could increase Firm A's profits by producing and selling 10 percent more output.

Question

Quizplus · Accepted Answer

If Firm A produces and sells more than 100 units, it could increase its profit by capturing a larger market share, assuming Firm B sticks to the agreed 100 units. However, this would break the cartel agreement and could lead to a price war.

Suppose That an Industry Consists of a Two-Firm Cartel: Firm