Which of the Following Reflects the Incentive Structure Confronted by a Typical

question 173

Multiple Choice

Which of the following reflects the incentive structure confronted by a typical firm in a cartel?

• A) If I alone cheat, I'm better off; if everyone cheats, I'm worse off.
• B) I can never do better for myself than by following agreed-upon cartel policies.
• C) If everyone cheats, I'm better off and so is everyone else in the cartel.
• D) If I suspect others are planning to cheat, I'll do best for myself by deciding not to cheat.

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Definitions:

Elimination

In accounting, the process of removing intercompany transactions and balances from the financial statements of a group of companies consolidated as one entity.

Intercompany Profits

Profits that arise from transactions between companies within the same group, which are not realized from the perspective of the consolidated entity.

Consolidation Method

An accounting method used when a parent company includes the financials of its subsidiary into its own financial statements.

Unrealized Profits

Profits that have been earned on paper through an investment's increased value but have not yet been realized through a sale.