Consider the market for corn. Suppose this is a competitive industry, made up of many price-taking farmers. We begin in a situation where market price is p0, industry output is Q0, and the typical farm is earning zero profit.
a. Draw the two diagram below.

b. Now suppose that the farmers in this industry form a cartel and collectively agree to restrict the industry output of corn to the level that a monopolist would produce. Call this level of output Q and call the new price p. Each firm now produces output of qMc. Show how the cartel raises the profits for the typical farmer.
d. Now consider the incentives for an individual farm to cheat on its fellow cartel members. Would it be profitable to produce an extra unit and sell it at the cartel price? How is this incentive illustrated in your diagram?
e. Show how the typical farm's profits would rise if it were the only farm to cheat. What level of output would the cheating farm produce?
f. Explain what would happen if all farms tried to cheat in this way.

Transcribed Image Text:

MC ATC Output Output Typical Corn Farmer Corn Industry