Why do some firms in an oligopoly refrain from colluding?
What will be an ideal response?
There are two main reasons why firms may refrain from colluding. First, the nature of competition predicts that although the firms may have a verbal agreement that they will both set high prices, they may still engage in secret price cutting to capture more of the profits for themselves. Thus, although collusion is a great deal for oligopolists, it is difficult to sustain. Second, price fixing is illegal. The potential punishment for engaging in such actions has a strong discouraging effect.
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A sum of money received at a future date is worth less than the same sum of money received today. Why? Explain this with an example.
What will be an ideal response?
Suppose antitheft auto alarms are produced in a price-taker market that is initially in long-run equilibrium. It is estimated that only 23 percent of all autos have alarms. Due to rising auto theft, Congress mandates alarms in every vehicle. Assume complete compliance. If the industry is an increasing cost industry, price will
a. increase in both the short run and long run. b. decrease in both the short run and long run. c. increase in the short run but not in the long run. d. decrease in the short run but not in the long run.
A new fad dramatically increases the demand for donut-holes, the leftovers produced from donut production. According to economic theory, one would expect
A. the price of donuts to fall. B. that one cannot tell. C. the price of donuts to stay the same. D. the price of donuts to rise.
Suppose a monopolist reduces its price in an effort to expand output. If the price effect equals the quantity effect, then the marginal revenue will be zero.
a. true b. false