Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Collusion leads to lower prices and reduced profits
B
Collusion allows firms to set higher prices and maximize profits
C
Collusion has no impact on profit levels
D
Collusion increases competition and decreases profit
Understanding the Answer
Let's break down why this is correct
Answer
In an oligopolistic market, a few large firms dominate and have the power to influence prices and production levels. When these firms engage in collusion, they work together to set prices higher than they would in a competitive market, which allows them to earn more profit. For example, if two car manufacturers agree to limit their production, they can raise the prices of their cars, leading to higher profits for both. However, this behavior can lead to a lack of competition, which is often not good for consumers, as they end up paying more. In the long run, if firms continue to collude, they may face legal consequences and the market may become unstable.
Detailed Explanation
When firms in an oligopoly work together, they can agree to raise prices. Other options are incorrect because Some might think that collusion lowers prices; It's a common mistake to believe collusion has no effect on profits.
Key Concepts
Collusion
Profit Maximization
Market Structure.
Topic
Economic Profit and Oligopoly
Difficulty
hard level question
Cognitive Level
understand
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