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All members of a resource cartel share a common objective, namely increase prices as much as possible.
Whether true or false.
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- Why are cartel agreements often not successful? Different firms experience different costs. All parties would make more money if everyone increased production. One party has an incentive to cheat to make more profit?Which of the following methods could a cartel NOT use to prevent its member fırms from breaking their agreements? If a member fırm breaks its agreement, it is a breach of contract and the firm is subject to legal penalties. The cartel acts as a monopolist, maximizing the combined profits of all the member firms. All of the other choices could be used to prevent member firms from breaking agreements. The cartel requires member firms to structure executive pay in such a way that the executives benefit personally from preserving the cartel. If a member firm breaks its agreement, that firm is kicked out of the cartel permanently and can no longer earn cartel profits in the future.Breakdown of a cartel agreement
- Two firms compete on price every year. The inverse demand function each firm faces depends on which firm has chosen the lowest price that year. The one that did captures the entire market. If, on the other hand, both prices are the same then they split the market evenly. Consumers round up prices to the nearest integer. For the firm with the lowest price p, demand is given by: q = 24-2p: Marginal costs are constant and equal to $4 for both firms. a. Define the Normal form of the stage game and determine the Nash Equilibria, the Cooperative Equilibrium and the Optimal Deviation from cooperation. b. For the once repeated (2 stages) game, determine if a Nash Equilibrium exists that improves on simply playing the (better) Nash Equilibrium of the stage game twice c. For the infinitely repeated game, determine what the interest rate would have to be to prevent the firms from cooperating. d*. Determine the relation between the interest rate and the number of punishment periods in a…Consider two firms, referred to as firms 1 and 2, who compete in a market by choosing quantities produced and face the following inverse demand: P(Q) 10-20 Each firm has a marginal cost of production of $4.00. Suppose these firms collude by agreeing to produce quantities to maximize their joint profits. Firm 1 sticks to the agreement, but firm 2 does not. If firm 2 can secretly change its produced quantity, how much would it produce?Cartels have a difficult time maintaining their output agreements because an individual firm has an incentive to deviate (increase their output) from the arrangement. T/F
- Suppose that a price-taker firm has a marginal cost function given by: MC= 20+0.2q. The firm could join a cartel in its industry and agree to a quota of 10 units. The collusion drives the price of the good from $24.55 to $50.00. Suppose that if the firm cheats on the cartel, it has no effect on the price. Calculate the producer surplus of this firm when they cheat on the cartel.The Organization of Petroleum Exporting Countries (OPEC) is an international cartel. If the cartel were to hire a consulting firm to monitor the production rates of member countries, the economic reason for this monitoring would be to Multiple Choice make sure that each member country is producing at an output level at which price equals marginal cost. make sure all the member countries produce at least their quotas so that there will be no oil shortage. detect those member countries that are depressing prices by producing more than their assigned quotas. make sure that the marginal revenue for the last barrel of oil sold by each member country is less than its price.When deciding on output levels, members of a cartel set their output where MR = MC. produce the same level of output as if they were in a competitive market. take into account the impact of changes on members' profits. act as if they were monopolies.
- The Organization of Petroleum Exporting Countries (OPEC) is a cartel that attempts to keep oil prices high by restricting output. As part of that process, each member nation is assigned a production quota; most members have nationalized their oil industry so that the government controls overall production. However, member nations routinely exceed their production targets. Why might OPEC often have difficulty keeping output low and prices high? Oil production costs differ greatly among OPEC members. More politically stable OPEC members (e.g., monarchies) have little incentive to take a long view and so often act to achieve short-run gains. It's very difficult for OPEC to punish cheaters. It's very difficult for OPEC to detect cheaters.In cases where a cartel controls access to a key production input, firms in the cartel: have less incentive to cheat for fear that they will be cut off from the key input. will always have an incentive to cheat on the agreement, as cheating increases profits. are typically good at finding ways to access the key input outside the cartel. will never cheat on the cartel agreement.Two firms compete by choosing price. Their demand functions are and Q₂ =20+P₁-P2₁ where P₁ and P₂ are the prices charged by each firm, respectively, and Q₁ and Q₂ are the resulting demands. Note that the demand for each good depends only on the difference in prices; if the two firms colluded and set the same price, they could make that price as high as they wanted, and earn infinite profits. Marginal costs are zero. Suppose the two firms set their prices at the same time. Find the resulting Nash equilibrium. What price will each firm charge, how much will it sell, and what will its profit be? (Hint: Maximize the profit of each firm with respect to its price.) Each firm will charge a price of $1. (Enter a numeric response rounded to two decimal places.) Each firm will produce units of output. In turn, each firm will earn profit of $ Suppose Firm 1 sets its price first and then Firm 2 sets its price. What price will each firm charge, how much will each sell, and what will be profits?…
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