Firm X is considering whether to co-operate with its rival so that their joint profit is $4000 a month
($2000 each). It calculated that, if it did not co-operate, its own profit would be $2800 a month
provided it kept all its customers itself. However, if its rival undercut X's price and took some of
X's customers then X's profit would be $1200. It has no knowledge of what the rival's policy will
be.
What describes the situation that the firm is facing?

Q: What topic does this question test?

This question tests Market Structures in A-Level Economics (syllabus code 9708). It is worth 1 mark.

Q: Which exam paper is this question from?

This question appeared in the Cambridge A-Level Economics Oct/Nov 2017 examination, Paper 3 Variant 1 (9708_w17_qp_31.pdf).

Question

Firm X is considering whether to co-operate with its rival so that their joint profit is $4000 a month
($2000 each). It calculated that, if it did not co-operate, its own profit would be $2800 a month
provided it kept all its customers itself. However, if its rival undercut X's price and took some of
X's customers then X's profit would be $1200. It has no knowledge of what the rival's policy will
be.
What describes the situation that the firm is facing?

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