(Figure: Monopoly Profits in Duopoly) Use Figure: Monopoly Profits in Duopoly.The figure shows how an industry consisting of two firms that face identical demand curves (D₁) can collude to increase profits.The market demand curve is D_2. Which assumption is part of the analysis illustrated by the model?

A) The two firms have identical marginal cost but different average total cost.
B) The two firms sell differentiated products.
C) The MR curve is not relevant to either firm's choices.
D) The firms can act as a cartel and maximize their combined economic profit.

The analysis assumes that the two firms can collude and act as a cartel to maximize their combined economic profit. This is illustrated by the joint marginal revenue and marginal cost curves (MRMC2) and the resulting monopolistic output level (Q2) and price (P2) in the figure. If the firms competed instead, each firm would produce the competitive output level (Q1) and earn a lower profit (π1). Therefore, collusion allows the firms to obtain monopoly profits in a duopoly market. The other assumptions, such as identical demand curves, are given in the question and do not affect the choice of D.