Question

Consider Figure 26-3, and suppose that this typical firm has agreed to participate in the proposed cartel. What is the total dollar amount of the firm's economic incentive to cheat on the cartel agreement, assuming that all other firms continue to abide by the agreement? Explain your reasoning.

Short answer

The firm procures a benefit of $$\$7000$ each week in the event that it undermines the cartel.

Step-by-step solution

Given Information

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

Explanation

Assuming the firm chooses to undermine the cartel arrangement (panel b); it can create $7000$units each week and sell at $\$7$per unit. Hence, the absolute revenue is $\$49000$each week. The expense related to this result level is $\$6$per unit, and $\$42000$each week. The firm procures a benefit of $\$7000$each week in the event that it undermines the cartel.

In this way, how much economic impetus for a firm to undermine the cartel is$\$7000-\$3000=\$4000$