Acme and Tartine are identical bakeries and are the only suppliers of baguettes in San Francisco. They have agreed to form a cartel: they jointly sell Q=16 baguettes and charge P=9 . Each bakery shall produce half of the joint quantity. Acme is tempted to cheat on the cartel agreement and increase its own production by 2 units. Acme knows that if they cheat, there is a 50% chance Tartine will catch them and force them to pay a fine of F that is taken out from their profits. If the market demand curve is Q=34-2p and the marginal cost of producing baguettes is constant and equal to 1 (assume there are no fixed costs), how big does F have to be to make Acme indifferent between cheating and not?

Answer rating: 100% (QA)

To determine the value of F that would make Acme indifferent between cheating and not cheating on the cartel agreement we need to compare the profits ... View the full answer