1. A recent news report suggests that 30 firms that grow and export walnuts decide to form a cartel that aims to raise the price of walnuts and reduce output to increase profit. What can be predicted about the future of this cartel
Answer: C
The cartel will probably not be successful because the number of firms is unmanageable and there are substitutes for walnuts.
The future of the cartel is likely bleak due to the unmanageable number of firms involved and the presence of substitutes for walnuts, which can undermine their pricing strategy.
A) The cartel will probably not be successful because the number of firms forming the cartel is too low.
This option incorrectly identifies the number of firms as the primary issue, stating that it is too low. In fact, the cartel consists of 30 firms, which is a significant number that complicates enforcement of agreements rather than supporting their success.
B) The cartel will probably be successful because agreements among domestic firms are easily enforceable, and walnuts are grown in a limited number of areas.
While it may seem that agreements could be enforceable due to limited growing areas, the reality is that the complexity of managing 30 firms makes enforcement challenging. Additionally, the existence of substitutes means that consumers can easily switch if prices rise, undermining the cartel's efforts.
C) The cartel will probably not be successful because the number of firms is unmanageable and there are substitutes for walnuts.
This option accurately captures the challenges faced by the cartel. With 30 firms, it becomes difficult to maintain cooperation and control production levels. The availability of substitutes further complicates their ability to raise prices without losing customers.
D) The cartel will probably be successful because the demand for walnuts is highly elastic.
This option is incorrect because if the demand for walnuts were highly elastic, any price increase would lead to a significant drop in quantity demanded. This indicates that consumers are sensitive to price changes, making it difficult for the cartel to successfully raise prices.
Conclusion
The correct answer, C, highlights the difficulties of managing a large cartel and the impact of substitutes on pricing strategies. Other options fail to recognize the complexity introduced by the number of firms involved and the market dynamics that allow consumers to switch to alternative products, which would ultimately hinder the cartel's success.