Consider a cartel consisting of several firms that is maximizing economic profit.If one firm cheats on the cartel agreement by cutting its price and increasing its output,the best response of the other firms is to
A)cancel the cheating firm's membership in the cartel.
B)continue to sell at the agreed-upon price.
C)raise their price to recapture lost profit.
D)cut their prices also.
E)cut output to keep total cartel output at its original level.

Question

Quizplus · Accepted Answer

When one firm cheats on a cartel agreement by cutting its price and increasing its output, the best response for the other firms to maintain their market share and competitiveness is to cut their prices as well. This response helps them to stay competitive against the cheating firm's lower prices.

Consider a Cartel Consisting of Several Firms That Is Maximizing