b. Now suppose that the farmers in this industry form a
cartel and collectively agree to restrict the industry output
of corn to the level that a monopolist would produce. Call
this level of output and call the new price Each
firm now produces output of (Hint: Assume that
will be the same proportion of as is of )
Show this outcome in the two diagrams.
c. Show how the cartel raises the profits for the typical
farmer.
d. Now consider the incentives for an individual farm to
cheat on its fellow cartel members. Would it be profitable
to produce an extra unit and sell it at the cartel price?
How is this incentive illustrated in your diagram?
e. Show how the typical farm’s profits would rise if it were
the only farm to cheat. What level of output would the
cheating farm produce?
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