Question

Take a look at Figure 26-3. What is the total dollar amount of the typical perfectly competitive firm's economic incentive to join the proposed cartel, assuming that after the fact no firms cheat on the specified cartel agreement? Explain your reasoning.

Short answer

To join the proposed cartel, the perfectly aggressive firm requires a financial motivation of $\$3000$each week.

Step-by-step solution

Given Information

Under the perfectly serious market arrangement, the firm (board a) will create $5000$units each week and sell at cost $\$5$per unit. At the business level (board b), the absolute output is $250000$units each week and the market cost is $\$5$ per unit. From this, we can compute the number of firms in the market to be $50$.

Explanation

With $50$firms in the market, each will deliver 3,000 units each week and sell them at $\$7$per unit. At this price-output mix, the perfectly aggressive firm will acquire complete revenue of $\$21000$each week. The all-out cost related is $$\$18000$(from board b). Under a cartel, the firm will procure a benefit of $\$3000$each week. Then again, under perfect competition, the firm was procuring zero benefits. Consequently, to join the proposed cartel, the perfectly aggressive firm requirements a financial motivation of$\$3000$each week.