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Homework answers / question archive / If a duopoly has a collusive agreement that maximizes joint profit, then each duopolist has A
If a duopoly has a collusive agreement that maximizes joint profit, then each duopolist has
A. an incentive to cheat by raising its price.
B. no incentive to cheat.
C. an incentive to cheat by lowering its price.
D. an incentive to cheat by decreasing its output.
Answer: C
Each firm has an incentive to cheat by lowering prices and increasing output. This is because the other firm is artificially limiting supply which means your marginal revenue is above your marginal cost and thus you can increase profit by producing more which will decrease prices.