Scenario 17-1.

Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping.
-Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both Irun and Urun have the individual incentive to
A)hold production constant.
B)decrease production.
C)increase production.
D)increase price.

Question

Scenario 17-1.
​
Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping.
-Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both Irun and Urun have the individual incentive to
A)hold production constant.
B)decrease production.
C)increase production.
D)increase price.

Quizplus · Accepted Answer

As long as the combined level of output is less than the Nash equilibrium level, both Irun and Urun have the individual incentive to increase production. This is because by increasing production, they can capture a larger share of the world market and increase their profits. If they hold production constant, they risk losing market share to other producers. If they decrease production, they risk losing their existing market share to the other country.

Scenario 17-1. ​

Scenario 17-1.