Maximizing Profits: Cartel Formation in Economics
What would happen if Widget Company and Ajax Company formed a cartel?
a. Widget Company charging the high price and Ajax Company charging the low price.
b. Widget Company charging the low price and Ajax Company charging the low price.
c. Widget Company charging the low price and Ajax Company charging the high price.
d. Widget Company charging the high price and Ajax Company charging the high price.
Final Answer: If Widget Company and Ajax Company form a cartel, they would act like a monopoly where they choose the quantity where marginal revenue equals marginal cost. This results in a higher monopoly price. Thus, both companies would charge a high price, establishing an equilibrium.
Answer:
If Widget Company and Ajax Company form a cartel, they would act like a monopoly where they choose the quantity where marginal revenue equals marginal cost. This results in a higher monopoly price. Thus, both companies would charge a high price, establishing an equilibrium.
When Widget Company and Ajax Company form a cartel, they essentially collude to reduce competition and act as a single entity controlling the market. This allows them to set prices at a level that maximizes their joint profits, similar to a monopoly.
By coordinating their pricing strategies, both firms can avoid price wars and undercutting each other, leading to stability in the market. This equilibrium benefits the companies by enabling them to charge a higher price and increase their profits.
Understanding the concept of cartel formation in economics sheds light on how firms can strategically collaborate to manipulate market forces and optimize their financial gains. By acting as a unified force, Widget Company and Ajax Company can achieve a mutually beneficial outcome.
Cartels and monopolies play a significant role in shaping market dynamics and pricing strategies. Explore more about the impact of cartels and monopolies on economics to deepen your understanding of market structures and competition.