The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of 12 countries that controls roughly two-thirds of the world’s oil production. The cartel gives countries quotas for production. Which of the following statements are correctly describing a cartel such as OPEC?a. Each country has a dominant strategy to keep their quota regardless of what the other members do.
b. The cartel benefits if everyone keeps their quota.
c. If one member cheats on the agreement the others are also likely to increase their production.
d. The cartel benefits if everyone cheats and produces more.
e. If one member cheats on the agreement the others are still likely to keep their assigned quotas.
f. Each country has a dominant strategy to overproduce to increase profits.

A cartel is termed as an organization that is established by the formal agreements and obligations that are to be agreed upon by the group of producers. This is done to regulate the supply of goods and services in the economy for the comfortability of the customers.

The correct options are:

b. The cartel benefits if everyone keeps their quota.

c. If one member cheats on the agreement the others are also likely to increase their production.

f. Each country has a dominant strategy to overproduce to increase profits.

Options B, C, and F are all correct because of the following reasons:

Options a, d, and e are wrong because they do not specify the dominant strategy of the country to keep their quota regardless of what the other members do.

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b. The cartel benefits if everyone keeps their quota.

c. If one member cheats on the agreement the others are also likely to increase their production.

f. Each country has a dominant strategy to overproduce to increase profits.

Explanation:

Options B, C and F are all correct because,

The Cartel will indeed benefit if everyone keeps their quota because there will be no competition and they can therefore sell optimally.

However like in Option C, if one member cheats then all members are likely to cheat to ensure that their profitability margins are maintained.

It is worthy of note however, that because they each have quotas, overproduction or producing above their required quota is the dominant strategy as it means that they stand to make profits by selling more than they are limited to.

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