Chapter 12R, Problem 4MCQ

To determine

The correct option for government regulation that government should consider while facing certain issues with the firm.

Answer to Problem 4MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

Cartel refers to the formation of groups that explicitly agrees to reduce the output level so that high prices can be charged. Cartel formation is illegal where members can exert some form of pressure to other competitors. For instance, cartel member reduces the oil production so that oil prices can be increased. Government can impose antitrust policy to control such acts. Therefore, option d is correct.

Explanation for incorrect options:

a.

Prisoner’s dilemma is a strategy of game theory where every party ( there is no explicit communication) can win if it chooses to cooperate instead of competing. Government does not need to regulate such act as it is not harming directly to others. Therefore, option a is incorrect.

b.

Government should not try to increase the competition that can lead to price war. If it is done then it can cause harm to both firm and the customers. Therefore, option b is also incorrect.

c.

Government should be concerned with the welfare of the society and the country by imposing trade regulations instead of regulating profit. Therefore, option c is incorrect.

e.

Government regulations are usually more concerned with the fair trade policies so that social and economic welfare can be ensured. By increasing non price competition, firms may face economic issues. Therefore, option e is incorrect.

Economics Concept Introduction

Cartel: Cartel refers to the formation of groups that explicitly agrees to reduce the output level so that high prices can be charged.

Tacit Collusion: In tacit collusion there is no legal agreement between the firms so that they can realize higher revenue and profit