Two Firms Would Sometimes Be Better Off If They Got

question 20

Multiple Choice

Two firms would sometimes be better off if they got together and agreed to charge a high price, rather than to compete and risk having to charge a lower, competitive price.What is the greatest deterrent to this strategy?

• A)The firms may find that the price they charge is greater than the price that would maximize their profits.
• B)An agreement by firms to charge high prices is illegal. The government can fine the firms and send their managers to jail.
• C)Consumers may resent having to pay high prices and not buy from either of the firms.
• D)One of the firms may decide to lower its price and take business away from the firm that charged the high price.

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Definitions:

Price Elasticity of Demand

An indicator of the sensitivity of the demand for a product to variations in its price.

Midpoint Method

A technique used to calculate the elasticity of demand or supply between two points on a curve by averaging the two points' prices and quantities.

Cable TV Service

A subscription-based service that delivers television programming through coaxial or fiber-optic cables.

Inelastic

Describing demand or supply with little to no response to changes in price.