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- When deciding on output levels, members of a cartel
- set their output where MR = MC.
- produce the same level of output as if they were in a competitive market.
- take into account the impact of changes on members' profits.
- act as if they were
monopolies.
Step by step
Solved in 3 steps
- 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…Suppose that a price-taker firm has a marginal cost function given by: MC= 20+0.2q. The firm could join a cartel in its industry and agree to a quota of 10 units. The collusion drives the price of the good from $24.55 to $50.00. Suppose that if the firm cheats on the cartel, it has no effect on the price. Calculate the producer surplus of this firm when they cheat on the cartel.
- One factor that has prevented the formation of cartels for producers of commodities is that: a) Commodity produces have been able to dominate world markets. b)Production of most commodities is capital intensive. c) The demand for commodities tends to be price inelastic d)Substitute products exist forany commoditiesEach member of a cartel a. faces a temptation to cheat on the agreement because lowering its price slightly below the established price will usually increase the firm's sales and profit. b. faces a temptation to cheat on the agreement because raising its price slightly above the established price will usually increase the firm's sales and profit. c. has no temptation to cheat on the agreement because lowering its price slightly below the established price will usually have no impact on the firm's sales and profit. d. has no temptation to cheat on the agreement because raising its price slightly above the established price will usually decrease the firm's sales and profit. e. has no temptation to cheat on the agreement because lowering its price slightly below the established price will usually lower the firm's sales and profit.OPEC is a petroleum cartel, a group of oil producing countries whose objective is to coordinate and unify petroleum policies. What type of market structure is a cartel?
- 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. 4. If the firms interact only once, is there a profitable deviation (cheating) from cartel for any firm? Find the profit of the firms in case of cheating. If a firm deviates from cartel (cheats) it will play its profit maximizing quantity, which is the quantity on its best response function. Now, use the best response function of firm 1 to find firm 1's cheating quantity, when firm 2 follows the rules of the cartel. Use the demand curve to find the new price level and then calculate profits. 5. Design a 2x2 normal form payoff matrix with strategies cartel and cheat. Complete the payoffs using the profits you calculated in the previous parts. Firm 2 Cartel Cheat Firm 1 Cartel Cheat 6. Now, assume that players interact twice. Hence the game is a twice repeated game. Is it possible to have (cartel,cartel) as an outcome?…The demand for a product is Q = 100 P. Initially the marginal cost is MC0 = 40 and the price is P0 = 40. (a) What is the total surplus and If a cartel forms, the price rises to P1 = 70, and the marginal cost stays the same at MC1 = 40. What is the total surplus with a cartel? (b) If a merger happens, the price would become P2 = 70 and the marginal cost would become MC2 = 30. What is the total surplus after the merger? (c) Consider again the merger. Keeping all the others parameters fifixed, for what values of P2 should the merger be allowed? (Your can say something like “the merger should be allowed if P2 is more than 50”, or “the merger should be allowed if P2 is less than 50”.)In the long run, an oligopoly Multiple Choice will produce less than a monopoly. may be able to earn positive economic profits. will always produce in the range of decreasing returns to scale. will produce on the portion of the demand curve where demand is price-inelastic.