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Suppose there are three firms in the cartel. If one of the firms cheats and produces...

Suppose there are three firms in the cartel. If one of the firms cheats and produces one additional unit, how will that impact the cheating firm's revenues and how will that impact the revenues of the non-cheating firms?

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Answer #1

When one firm in the cartel increases its production by 1 unit, the market price is reduced for all units because the production is increased. This increases the revenue for the cheating firm but decreases the revenue for the non cheating firms. this is because the non cheating firms have not changed their production but the price has decreased. This happens because the non cheating firms believe that all other firms will continue to produce the same level of output.

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