Say that two firms supply the entire quantity of a good in a market, and that ba

Question

Say that two firms supply the entire quantity of a good in a market, and that barriers exist which prevent other firms from entering the market. The two firms agree to limit the quantity they produce to raise the market price. The situation is as described in the ngure at the link below. http://drive.google.com/file/d/TTM6d72UGY4TZLDLuvRm3jdRR2vo12q/view?usp-sharing 4.4. The Pareto optimal outcome is: 0 O ° 0 A. Firm 2 cooperates, Firm 1 defects B. Both nrms cooperate C. Firn 1 cooperates. Firm 2 detects D. Both nrms defect Continue without saving

Explanation / Answer

B. Both firms cooperate.

Pareto optimal is a condition where no one is better of without making someone else worse off. Both earns higher payoff when they cooperate.

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