Refer to Figure 14.1. Four chewing gum producing firms form a cartel. The firms have identical cost structures. If the cartel produces the profit-maximizing output level, each firm should produce

A) 3,000 packs of chewing gum.
B) 4,000 packs of chewing gum.
C) 12,000 packs of chewing gum.
D) indeterminate output levels from this information.

Question

Kanjav Zaveri · Accepted Answer

Final Answer : A, Explanation :  When firms form a cartel, they act as a monopoly to maximize total profits. The profit-maximizing output is collectively determined, and then this output is divided equally among the firms. If the total profit-maximizing output for the cartel is 12,000 packs (as implied by the question's context), and there are four firms with identical cost structures, then each firm should produce 3,000 packs of chewing gum to maintain the cartel agreement and maximize profits.

Definitions

Learning Objectives

Learning Objectives

Related questions