Question

Cartel members have an incentive to cheat on the cartel because: A. the cartel does not maximize profits. B. the cartel price is the competitive price. C. each member's output quota is too high. D. each member's MR is not equal to the cartel's MC. E. the industry profit would be higher under competitive conditions.

Answer 1

The correct answer is E. the industry profit would be higher under competitive conditions. Cartel members have an incentive to cheat on the cartel because they can increase their own profits by producing and selling more than their allocated quota. If all members cheat, the industry output increases, driving down prices and reducing industry profits. However, if only a few members cheat and the rest stick to their quotas, the cheating members can reap the benefits of higher sales and profits while the non-cheating members maintain higher prices and profits.