CFA Practice Question

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CFA Practice Question

Which of the following relationships is (are) true in an oligopolistic market with collusion?

I. For a firm, marginal revenue = marginal cost
II. For a firm, marginal revenue = price
III. For the cartel, marginal revenue = marginal cost
A. I & III
B. III only
Explanation: When there is collusion, the cartel is effectively a monopoly in the market. A monopolistic firm will try to maximize profits and the relationship "marginal revenue = marginal cost" always holds when you maximize profits. Thus, for the cartel, marginal revenue will equal marginal cost. This, however, does not mean that each individual firm is maximizing its profits. In fact, each is producing at a level that is lower than the profit-maximizing level and has a strong incentive to increase output if it could prevent others from doing so at the same time.

User Contributed Comments 6

User Comment
keithinny why is II not true ?
eddeb II holds for price takers, not searchers
DannyZhou Unclear, if collusion is taking place, for each firm, MR=MC as well. ???
johnj mr = mc to get optimum quantity, not MR=Price as in choice II.
boddunah collusion happens when cartel forms.think "cartel" is key here.
nzohoury @DannyZhou if for each firm MR=MC then there would be no need to collude since both firms would be in profit maximizing equilibrium. The fact that they are colluding suggests that they would rather operate below maximum profit than compete and get to P point less than MR.
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