In a cartel,

A. each firm has an incentive to raise its price above the level set by the cartel.

B. each firm has an incentive to decrease its own output below the level set by the cartel.

C. each firm has an incentive to lower its price below the level set by the cartel.

D. the firms' marginal cost equals the price set by the cartel.

• The correct answer is C. each firm has an incentive to lower its price below the level set by the cartel.

A cartel is a type of agreement between the companies that are part of an oligopolistic market. Generally, a cartel agreement limits the supply of the product or service in the market to act similar to a monopoly. This supply limit helps to increase prices and boost profits for cartel members. However, cartels are very unstable due to self-interest behavior. That is to say, cartel members often break the agreement by producing more than they should or decreasing prices in order to increase their market share and individual profits. Thus, the correct answer is option C.

Options A. and B. are incorrect because those options mean that the price offered by the firm will be above the agreed by the cartel, therefore, the firm's individual profits would drop. Option D. is also incorrect because each firm has different marginal costs.