Question

A) In an oligopoly market, business often desire to form cartels or engage in covert collusion with each other. However, this tends to be difficult to maintain. Briefly describe at least two of the reasons collusion tends to be unstable.

B) Suppose Peter Dinklage, Danny Devito, and Joe Pesci own a tree-trimming company which earns $19 per tree. Business is good, so they are considering hiring a 4th worker. They know that this employee will allow them to trim an additional 6 trees each day.

1. What is the MRP of hiring this 4th worker?
2. If the new worker is to be paid a $115 daily wage, will they hire this 4th worker?
3. What is the highest wage this new employee could be paid?

Answer 1

Collusion is unstable due to following reasons:-

1) Collusion may lead to higher prices and if any small firm do not collides and keep selling product at lower prices then the firms which collides will have to face loss.

2) collusion, sometimes in many countries are illegal which leads to being a reason of instability of collusion.

3) by collusion, firms have to take care of other firm's production level. If any time, firm ovwrproduces then this will break the cartel and firms become competitors of each other

B) the owners of the company gain 19$ per tree.

And if any fourth worker cuts 6 tress daily then the maximum amount which the owners can give him as a per wage will be :- 19× 6 = 114.

So, producer will hire the 4rth worker at the maximum wage of 114 per day.

They will not hire 4rth worker at 115$ per day for his work.