Suppose Two Firms, FastNet and SmartCast Are the Only Fast

question 141

Multiple Choice

Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other's. The industry is a natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market equally.
-In the scenario above, which of the following actions will maximize the industry's economic profit?

• A) Both firms comply with the agreement.
• B) Both firms cheat on the agreement, producing more than the agreed amount.
• C) One of the firms complies with the agreement while the other firm cheats, producing more than the agreed amount.
• D) Because the firms are colluding, the profit does not change regardless of whether the firms comply with agreement or cheat on the agreement.

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Definitions:

Creditors

Individuals or institutions to whom money is owed by a debtor, typically arising from the provision of goods, services, or loans.

Asset

Resources owned by a company or individual that are expected to bring future economic benefits.

Liability

A financial obligation of a business that it is required to repay in the future.

Owner's Equity

The residual interest in the assets of an entity after deducting liabilities, representing what the owners own outright in the company.