Question: Exercise 4 - Cartels and output reduction Suppose that a cartel has just been created that includes both large and small firms, each having different

Exercise

4 -

Cartels and output reduction

Suppose that a cartel has just been created that includes both large and small firms, each having different average and marginal cost curves. The cartel agreement is for each member to reduce its output by

20

percent from the current level. Suppose that the current level of industry output approximates the competitive output level. Will this

20

percent reduction maximize the cartel's profit? Explain why or why not.

Exercise 4 - Cartels and output reduction Suppose

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