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:

Period Cost

Expenses that are not directly tied to the production process and are expensed in the period in which they are incurred.

Manufacturing Company

An enterprise that processes raw materials or semi-finished goods into finished goods through the use of labor, machinery, tools, and chemical or biological processing or formulation.

Period Cost

Expenses on the income statement that are not directly tied to the production process, such as administrative salaries and marketing costs.

Supplier

An entity that provides goods or services to another entity, typically a part of the supply chain.