Firm A and B will both set high price. If both firms secretly cheat both firms will make a profit of $79.
Profit is defined in economics as the difference between an economic entity's total cost of inputs and the money it has generated from its outputs. Total income less total expenses, including both direct and indirect expenses, equals total cost. In contrast to accounting profit, which solely refers to costs that are explicitly stated on a company's financial accounts, it also includes implicit costs. The accounting profit of a corporation is determined by deducting simply its explicit costs from its total revenue. An economist takes into account both apparent and implicit expenses when assessing a firm. Therefore, economic profit is lower than financial profit.
To solve the question :
If both the firms aim at maximizing their combined profits, they will both charge high price as it will yield a combined profit of $174 (= $87 + $87). If one firm charge low price, and the other firm charges a high price, combined profit will be $166 (= $113 + $53) and if both the firms charge low price, combined profit will be $158 (= $79 + $79)
Therefore, firm A will set a high price and firm B will set a high price
If firm A secretly cheats and charge a low price, it will earn a profit of $113, while firm B will earn a profit of $53.
Therefore, the additional profit made by firm A when cheating is $26
(= $113 - $87).
If both the firms secretly cheats, both will earn a profit of $79.
Therefore, the fall in the profits of firm A when both are cheating instead of both respecting the collusive agreement is $8 (= $87 - $79).
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