Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?
A) The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.
B) The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion.
C) The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
D) The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact.
Question 2
Refer to Figure 13-14. It is possible to lower the average cost of production by expanding output beyond Q0 to Q1. Why wouldn't a firm expand its output to Q1?
A) Demand is not sufficient for consumers to buy Q1.
B) The firm wants to maximize accounting profit rather than economic profit.
C) The firm would suffer an economic loss at Q1 while it would break even at Q0.
D) The firm's marginal revenue would be negative at Q1.
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