The following graph shows the marginal cost (MC) and average total cost (ATC) and the initial demand (D₁) curves of a perfectly competitive firm. Suppose this firm forms a cartel with other firms in the industry. Because of the cartel agreement, it has been assigned a production quota of 35 units. The cartel price is $80 per unit of output. You may use the purple rectangle (diamond symbols) to help you answer the questions that follow. You will not be graded on any changes you make to the graph. PRICE (Dollars) 100 90 80 70 60 50 40 30 20 10 0 MC 0 10 20 I | ATC || D₂ If the firm adheres to the cartel agreement, its profits will be $ D₁ 1 30 40 50 60 70 80 90 100 QUANTITY (Units) Area If the firm breaks the cartel agreement and produces 85 units, its profits will be $ ?

The following graph shows the marginal cost (MC) and average total cost (ATC) and the initial demand (D₁) curves of a perfectly competitive firm. Suppose this firm forms a cartel with other firms in the industry. Because of the cartel agreement, it has been assigned a production quota of 35 units. The cartel price is $80 per unit of output. You may use the purple rectangle (diamond symbols) to help you answer the questions that follow. You will not be graded on any changes you make to the graph. PRICE (Dollars) 100 90 80 70 60 50 40 30 20 10 0 MC 0 10 20 I | ATC || D₂ If the firm adheres to the cartel agreement, its profits will be $ D₁ 1 30 40 50 60 70 80 90 100 QUANTITY (Units) Area If the firm breaks the cartel agreement and produces 85 units, its profits will be $ ?

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter11: Monopolistic Competition, Oligopoly, And Game Theory

Section: Chapter Questions

Problem 4WNG

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Consider an industry with two firms, each having marginal costs and total costs equal to zero. The industry demand is P = 100 − Q where Q = Q1 + Q2 is total output. 1. Find the cartel output and cartel profits assuming that the firms share the profit equally. In cartels, firms behave as if they are a monopoly. Hence, the cartel quantity is at the point where MR = MC. After finding the quantity, use the demand curve to find the cartel price. And then calculate Π = T R − T C. Divide the total profit by 2 to find each firm's profit. 2. If each firm behaves as a Cournot competitor, what is firm 1's optimal output given firm 2's output? This part is asking the best response function of firm 1. Solve firm 1's profit maximizatin problem by setting its MC = MR. Then, express Q1 as a function of Q2. 3. Calculate the Cournot equilibrium output and profit for each firm. You have already solved firm 1's problem above. Now solve firm 2's problem. Then, solve BR functions simultaneously to get…
Consider an industry with two firms, each having marginal costs and total costs equal to zero. The industry demand is P = 100 − Q where Q = Q1 + Q2 is total output. 1. Find the cartel output and cartel profits assuming that the firms share the profit equally. Hint: In cartels, firms behave as if they are a monopoly. Hence, the cartel quantity is at the point where MR = MC. After finding the quantity, use the demand curve to find the cartel price. And then calculate Π = T R − T C. Divide the total profit by 2 to find each firm’s profit. 2. If each firm behaves as a Cournot competitor, what is firm 1’s optimal output given firm 2’s output? Hint: This part is asking the best response function of firm 1. Solve firm 1’s profit maximizatin problem by setting its MC = MR. Then, express Q1 as a function of Q2. 3. Calculate the Cournot equilibrium output and profit for each firm. Hint: You have already solved firm 1’s problem above. Now solve firm 2’s problem. Then, solve BR functions…
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