Question

If an industry consisting of two firms produces a total of 12 units, the market price is $10. If 13 units are produced, the price falls to $9. Suppose the two firms form a cartel and agree to produce 6 units each. If one firm cheats and produces 7 units, the cheating firm's revenue rises by and the noncheating firm's revenue falls by a) $3; $12 b) $6: $12 c) $6: $6 d) $3: $6

Answer 1

d) $3: $6

Step-by-step explanation:

The computation is shown below:

Before the one firm cheats, the firm revenue is

= $10 × $6

= $60

Before the one firm cheats, the firm revenue is

= $9 × $7

= $63

No cheating firm's revenue

= $9 × $6

= $54

Now in case of cheating, it is

= $63 - $60

= $3

And, in the case of non cheating, it is

= $60 - $54

= $6