In a repealed decision for which the present value of the benefits of cheating i
ID: 1198422 • Letter: I
Question
In a repealed decision for which the present value of the benefits of cheating is less than the present value of costs of cheating, deciding not to cheat is a value-maximizing decision. deciding to cooperate is a value-maximizing decision. deciding to cheat is a value-maximizing decision. both a and b In the U.S., firms that engage in cooperative efforts to coordinate pricing are always in violation of antitrust laws. may face federal charges of illegal collusion if they cannot provide evidence that the coordination of prices was in the best interest of consumers. are simply trying to reach a Nash equilibrium and are not viewed by courts as necessarily breaking any laws. both b and c.Explanation / Answer
Quetsion 1
Answer (d)
Deciding not to cheat is a value maximizing decision and deciding to cooperate is a value – maximizing decision, because according to the equation,
Present value of benefit – (Ca(Pc(Co)))
Ca – probability of getting caught
Pc – probability that the caught person will be prosecuted
Co – probability that he will be caught and punished
Even if the person believes that cheating is a rational decision, he still has to bear the cost of punishment. With guilt of cheating and the probability of getting caught and punished not cheating and cooperating is the only available option for value maximization.
Question 2
Answer (a)
If the firms engage in cooperative efforts of coordinating pricing it is violation of law as the firms might be trying to cut down their competition by coordinating the prices. If in the case of oligopoly, there are two big firms and these firms cooperate on setting the price, then they will lower the prices of their product in order to prevent the new firms from entering the market. As these larger firms are generally operating on economies of scale and can lower their prices to prevent any further competition.
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