Question

In forming a cartel:

Select one:

a.

all firms will cooperate.

b.

there are no incentives to cheat.

c.

there are no incentives to cooperate.

d.

there are incentives to cheat.

In 2011, 11 modeling agencies in Singapore were found to have acted together in raising prices of modeling services. These firms acted as a:

Select one:

a.

disunion.

b.

cartel.

c.

co-op.

d.

Bertrand monopoly.

Cartels are:

Select one:

a.

extremely powerful and able to keep prices and profits high indefinitely.

b.

unstable and tend to lose market power over time.

c.

like monopolies that try to earn normal or competitive profits.

d.

firms that face perfectly elastic demand curves and increase profits by restricting output and raising prices.

Prices in an oligopolistic market are likely to be:

Select one:

a.

equal to that of a monopoly market.

b.

lower than that of a monopoly market.

c.

equal to that of a competitive market.

d.

lower than that of a competitive market.

Answer 1

1)

In forming a cartel :

(d) There are incentives to cheat.

In a cartel, each firm will have an incentive to cheat on their quota. If a single firm cheats on their cartel agreement, then that firm can increase its profit.

Thus the other options (a), (b) and (c) are incorrect.

2)

In 2011, 11 modelling agencies in Singapore were found to have acted together in raising prices of modelling services. These firms acted as a :

(b) Cartel.

When a group of independent market participants collude with each other in order to improve their profits and dominate the market, it is called a Cartel. Since the 11 modelling agencies colluded together to raise prices of their services, their actions perfectly fit the description of a Cartel.

Thus the other options (a), (c) and (d) are incorrect.

3)

Cartels are :

(b) Unstable and tend to lose market power over time.

Cartel agreements are economically unstable because they have a built-in incentive for each cartel member to cheat on the production quotas.

Thus, the other options (a), (c) and (d) are incorrect.

4)

Prices in an oligopolistic market are likely to be :

(b) Lower than that of a monopoly market.

A monopolise market can quote high prices and since there are no other competitors, the seller will use their status of dominance and maximize their profits. Oligopoly markets on the other hand, have more competition and hence have more competitive (lower) prices for the consumers.

Therefore, all other options (a), (c) and (d) are incorrect.