Why do firms in an oligopoly find it difficult to cooperate and ...

[lunatika]

Why do firms in an oligopoly find it difficult to cooperate and not cheat on a cartel agreement?
 
  What will be an ideal response?

Question 2

The above table gives the demand and supply schedules for cat food. If the price is 3.
 
  00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If 3.00 is the equilibrium price, what is the equilibrium quantity?

[upturnedfurball]

Answer to Question 1

Firms in an oligopoly have large market shares. When they change their output or price, the firm affects not only its own revenue and profit but also the revenue and profit of other firms. For example, if a firm cheats on a cartel agreement by lowering its price, it will capture a larger market share. The competitors' total revenue and profit decrease, but the cheating firm's profit increases. If the firms cooperate, they could act like a monopoly and have the maximum joint profit but each firm has the temptation to cheat and produce more than its share. This temptation is strong because cheating will increase the cheater's revenue and profit substantially.

Answer to Question 2

At a price of 3.00 per pound of cat food, there is a surplus. The surplus equals 44 tons (the quantity supplied) minus 35 tons (the quantity demanded), or 9 tons of cat food.