There are only two firms in the sugar industry. Each firm faces an identical demand curve, D1, and the market demand curve is D2. Which assumption is part of the analysis illustrated by the model?
options:
a) The two firms have identical marginal costs but different average total costs.
b) The two firms sell differentiated products.
c) The MR curve is not relevant to either firm’s choices.
d) The firms can act as a cartel and maximize their combined economic profit.
The correct answer and explanation is:
The correct answer is: d) The firms can act as a cartel and maximize their combined economic profit.
Explanation:
In the context of the sugar industry, where there are only two firms, the analysis likely refers to a model of oligopoly, specifically one in which the firms can form a cartel. A cartel occurs when firms within an industry agree to coordinate their production, pricing, and other strategies in order to maximize collective profits, as opposed to competing against one another.
When two firms dominate an industry, they often face the temptation to cooperate to reduce the intensity of competition. In this case, the two firms would have the ability to influence the market price by agreeing on output levels, pricing strategies, or other factors. This collusion allows the firms to maximize their joint profit as a monopoly would, rather than competing as individual firms within a competitive market. The cartel’s total output and price would be set in a way that maximizes their combined economic profit, much like a monopolist’s decisions, rather than being based on independent, competitive behavior.
The other options do not align with the assumptions typically made in the model of oligopolistic firms forming a cartel:
- Option a suggests that the firms have identical marginal costs but different average total costs, which isn’t a central assumption of cartel behavior.
- Option b mentions differentiated products, which typically applies to monopolistic competition, not oligopoly in its simplest cartel form.
- Option c suggests that the marginal revenue (MR) curve is irrelevant, but in the context of cartel models, firms still consider MR when setting output and prices.
Thus, the assumption that firms in this market can act as a cartel is the correct one, as it directly relates to the strategic coordination of output and pricing for joint profit maximization.