A Level Economics AQA Practice Exam

What is the purpose of a cartel?

1. To encourage competition among firms

2. To maintain prices at a high level and restrict competition

3. To innovate new products

4. To minimize production costs for consumers

The correct answer is: To maintain prices at a high level and restrict competition

The purpose of a cartel is primarily to maintain prices at a high level and restrict competition. A cartel is formed when firms in an industry come together to coordinate their pricing and output decisions. By agreeing to limit production or set prices collectively, cartel members can increase their profits by avoiding price wars that would typically occur in a competitive market. This behavior seeks to establish market control that resembles a monopoly, allowing the firms involved to manipulate market conditions to their advantage. As a result, while consumers may face higher prices and reduced choices, the cartel members benefit from greater market power and profitability. The other options present purposes that do not align with the fundamental objectives of a cartel; encouraging competition would lead to lower prices and innovation is typically a hallmark of competitive markets rather than cartel behavior. Minimizing production costs for consumers is also contrary to a cartel's goal, as higher prices and lower competition are hallmark traits of cartel activity.