Suppose Two Firms Form a Cartel

question 4

Essay

Suppose two firms form a cartel . Each have constant, but different, marginal costs. Explain why one firm will pay the other firm to produce no output.

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Definitions:

Fringe Benefits

Additional benefits offered to employees on top of their salaries, such as health insurance, retirement plans, and paid vacation.

Labor Market

The supply and demand for labor, where employees provide the labor, and employers provide the jobs.

Equilibrium

A condition where the supply and demand in the market are equal, leading to stable prices.

Marginal Product

The additional output that can be produced by adding one more unit of a specific input, holding all other inputs constant.