The Following Table Is for Two Towel Companies

question 4

Multiple Choice

The following table is for two towel companies. They each offer cotton towels that are highly absorbent and fluffy even though they are made from different cottons. Since every household uses towels, these firms believe that there will always be a tomorrow for their product. Both Tom and Cathy have agreed to charge high prices in order to make a more than normal profit. Which of the following is true?

• A) in the long run, it is in Cathy's Cotton's best interest to defect from their agreement and charge a lower price.
• B) in the long run, it is in Tom's Terrycloth's best interest to defect from their agreement and charge a lower price.
• C) there is no incentive for either firm to defect from the agreement
• D) the agreement is only rational as long as the interest rate is sufficiently low to make the gains from defecting less than the present value of the of the profit obtained from colluding.
• E) none of the above

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Definitions:

Payoff Matrix

A table that shows the payoffs for each player in a game for every possible combination of actions by the players.

Economic Profits

The financial gain achieved when revenues exceed both explicit and implicit costs.

Oligopoly Model

A market structure characterized by a few firms dominating the market, leading to strategic interactions in pricing and production.

Cournot

Refers to a model of duopoly competition in which companies choose quantity to produce independently, influencing the market price.