Perceived demand curve of shape decreases the incentive

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The Pretty Paper Company has joined a cartel of paper producers. Under the rules of the cartel, Pretty Paper will produce 1,500 packs of paper and sell them for $5 a pack. The members of the cartel watch each other to see if anyone is cheating. The Pretty Paper Company calculates if tries to make more money by raising the price of packs of paper to $6, they will be able to sell only 500 total packs. If they produce 2,000 packs, they will only be able to sell the packs for $2 each. Sketch the perceived demand curve for this firm. Explain how the cartel can create a demand curve of this shape and why a perceived demand curve of this shape decreases the incentive for any firm to diverge from the quantity and price agreed upon by the cartel.

Reference no: EM131092384

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