To maximize cartel profit, the members must allocate output so that the marginal cost for the final unit produced by each firm is

Question

Quizplus · Accepted Answer

If the marginal cost for the final unit produced by each firm is identical, it ensures that no member has an incentive to cheat on the cartel agreement by producing more output than assigned. This uniform production level would result in maximum joint profit for the cartel as a whole. If the marginal costs were unequal, some firms would have a lower marginal cost and would want to produce more output to increase their profits. This would lead to the collapse of the cartel. If the marginal costs were negative, it would mean that the firms would be willing to pay to produce, which is not a realistic scenario. If the marginal cost was equal to the firm's average total cost, the firm would be producing at break-even point leading to a lower profit than maximizing it. If the cartel maximizes the joint profit, it will benefit all members equally.

To Maximize Cartel Profit, the Members Must Allocate Output So