Q1. Freamon and Rawls are two firms in the sprocket industry in the UK. The market is a duopoly, there are no other competitors and it is unlikely that there will be entry in the medium term. A business journalist alleges that the two companies are acting as a cartel. You have been hired by the Competition and Markets Authority to conduct a preliminary investigation into the question. Your initial findings are used to develop a model of the firms in the industry. The model is laid out below. Both firms face the same cost and demand (so Qf = Qr) Total Cost is given by TC = 30(q) and demand = 180-q1-q2 Demand is given by P = 180-Q, where Q = q₁ + qr You may therefore assume that MC₁= MCr = 30, MRf= 180-2qf-qr A) Calculate the profit maximising output (q), and price (P) for both firms (8) B) Calculate the amount of profit made at that output. (4) Suppose that if the industry were cartelised, then it could be represented as a hypothetical monopolist. The marginal cost of production would be given by: MC = 30 for marginal cost. P = 180- Q for demand, MR = 180-2Q for marginal revenue. C) Calculate the profit maximising output and profit gained by the hypothetical monopolist and give an opinion on whether it likely that this industry is cartelised.
Q1. Freamon and Rawls are two firms in the sprocket industry in the UK. The market is a duopoly, there are no other competitors and it is unlikely that there will be entry in the medium term. A business journalist alleges that the two companies are acting as a cartel. You have been hired by the Competition and Markets Authority to conduct a preliminary investigation into the question. Your initial findings are used to develop a model of the firms in the industry. The model is laid out below. Both firms face the same cost and demand (so Qf = Qr) Total Cost is given by TC = 30(q) and demand = 180-q1-q2 Demand is given by P = 180-Q, where Q = q₁ + qr You may therefore assume that MC₁= MCr = 30, MRf= 180-2qf-qr A) Calculate the profit maximising output (q), and price (P) for both firms (8) B) Calculate the amount of profit made at that output. (4) Suppose that if the industry were cartelised, then it could be represented as a hypothetical monopolist. The marginal cost of production would be given by: MC = 30 for marginal cost. P = 180- Q for demand, MR = 180-2Q for marginal revenue. C) Calculate the profit maximising output and profit gained by the hypothetical monopolist and give an opinion on whether it likely that this industry is cartelised.
Chapter14: Monopolistic Competition And Product Differentiation
Section: Chapter Questions
Problem 16P
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Transcribed Image Text:Q1.
Freamon and Rawls are two firms in the sprocket industry in the UK. The market is a duopoly,
there are no other competitors and it is unlikely that there will be entry in the medium term. A
business journalist alleges that the two companies are acting as a cartel. You have been hired by
the Competition and Markets Authority to conduct a preliminary investigation into the question.
Your initial findings are used to develop a model of the firms in the industry. The model is laid out
below.
Both firms face the same cost and demand (so Qf = Qr)
Total Cost is given by TC = 30(q) and demand = 180-q1-q2
Demand is given by P = 180 - Q, where Q = q₁ + qr
You may therefore assume that
MCf= MC₁ = 30,
MRf = 180-2qf-qr
A) Calculate the profit maximising output (q), and price (P) for both firms (8)
B) Calculate the amount of profit made at that output. (4)
Suppose that if the industry were cartelised, then it could be represented as a hypothetical
monopolist. The marginal cost of production would be given by:
MC = 30 for marginal cost.
P = 180- Q for demand,
MR = 180-2Q for marginal revenue.
C) Calculate the profit maximising output and profit gained by the hypothetical
monopolist and give an opinion on whether it likely that this industry is cartelised.
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