(Scenario: Two Identical Firms) Use Scenario: Two Identical Firms.If one firm decides to cheat,the cheating firm will: Scenario: Two Identical Firms
Two identical firms make up an industry in which the market demand curve is represented by Q = 5,000 - 4P,where Q is the quantity demanded and P is price per unit.The marginal cost of producing the good in this industry is constant and equal to $650.Fixed cost is zero.

A) be able to increase its profits initially.
B) find that cheating leads to a decrease in its profits alone.
C) find that cheating initially leads to an increase in both firms' profits.
D) find that the other firm has an increase in its profits alone.

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Ahmed Patni · Accepted Answer

Final Answer : A, Explanation :  If one firm decides to cheat, it can lower its price below the market price, causing an increase in its sales and profits. However, the other firm will not be able to compete with this lower price and will lose sales and profits. Therefore, initially, the cheating firm will be able to increase its profits. However, in the long run, this will lead to a price war and decrease in profits for both firms.

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