monopoly quantity and a height equal to the difference between price (on the demand above the

monopoly quantity) and average cost, as shown in the following figure.

b. The firms will expand output and cut price as long as there are profits remaining. The long-run

equilibrium will occur at the point where average cost equals demand. As a result, the oligopoly will

earn zero economic profits due to “cutthroat competition,” as shown in the next figure.

c. Pc > Pcc. Qc < Qcc. Profit for the cartel is positive and large. Profit for cutthroat competition is zero.

4. Firm B reasons that if it cheats and Firm A does not notice, it will double its money. Since Firm A’s profits

will decline substantially, however, it is likely that Firm A will notice and if so, Firm A will cheat also, with

the result that Firm B will lose 90% of what it gained by cheating. Firm A will reason that Firm B is unlikely
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