Trendy's and Style Store are the only two clothing manufacturers in a market. The two stores wish to collude to form a cartel. Based on the payoff matrix to the right, what level of output should each firm select if they wish to maximize joint profits? The first number in each pair is Trendy's profit; the second is Style Store's profit. All numbers are in millions of dollars. Trendy should choose ▼ a high output a low output , and Style Store should choose ▼ a high output a low output . One reason why this cartel is likely to fail is because A. the cartel's output is too high. B. it is not profitable. C. each firm has an incentive to cheat and produce more. D. there are too many firms in the market.

Question

07-05-2020
Business

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Trendy's and Style Store are the only two clothing manufacturers in a market. The two stores wish to collude to form a cartel. Based on the payoff matrix to the right, what level of output should each firm select if they wish to maximize joint profits? The first number in each pair is Trendy's profit; the second is Style Store's profit. All numbers are in millions of dollars. Trendy should choose ▼ a high output a low output , and Style Store should choose ▼ a high output a low output . One reason why this cartel is likely to fail is because A. the cartel's output is too high. B. it is not profitable. C. each firm has an incentive to cheat and produce more. D. there are too many firms in the market.

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Martebi Martebi · Answer 1 · 2020-05-09T03:41:46+02:00

Answer: Trendy should choose a low output, and Style Store should choose a low output; One reason why this cartel is likely to fail is because each firm has an incentive to cheat and produce more (low output, a low output, option c: each firm has an incentive to cheat and produce more)

Explanation:

a cartel can simply be said to be a union or the association of producers in some specific industry that arrive at a joint agreement/consensus to bring about or set common prices specific and also output quotas so as to mitigate, limit or prevent competition.

in the enforcement of a cartel agreement, it is very unreliable and difficult because firms in the cartel have an incentive to cheat on the agreement