No SIM 12:59 PM 50% mail-attachment.googleusercontent.com 3. Oligopoly: Isolated
ID: 1107422 • Letter: N
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No SIM 12:59 PM 50% mail-attachment.googleusercontent.com 3. Oligopoly: Isolated Island has two taxi companies, one owned by Ann and the other owned by Zack. The figure shows the demand curve and marginal revenue for taxi rides and the average total cost Price 20 Note: the graph is not exactly to scale. Select the corresponding prices and quantities from the values shown, ie. P=$10 not $7.50 15 ATC MC MR 15 30 45 Quantity (rides per day) Competitive Outcome, (Pcomp, Qcomp.) If Ann and Zack each produce the same quantity of rides as would be produced in perfect competition, what is the total quantity of rides economic profit of Ann and Zack? taxi industry in long-run equilibrium] a. the price per ride, and the [Think of the perfectly competitive Non-Competitive Outcome, (PM, QM) If Ann and Zack form a cartel and produce the same quantity of rides as would be produced in a monopoly, what is the total quantity of rides the economic profit of Ann and Zack? b. the price per ride_ c. Would Ann and Zack have an incentive to break the cartel agreement and cut their price to increase the number of rides? ExplainExplanation / Answer
(a) Competitive outcome is at intersection of Demand & MC curves. Note that Profit = Quantity x (Price - ATC)
Total quantity = 30
Price = 5
Profit = 0 (In long run equilibrium, perfectly competitive firms earn zero economic profit)
(b) Monopoly equilibrium is at intersection of MR & MC curves.
Total quantity = 15
Price = 10
Profit = 15 x (10 - 5) = 15 x 5 = 75
(c) Both of them has an incentive to break the cartel and more than the agreed-upon quantity, because such an action will increase the individual profit earned than under the monopoly (cartel) agreement. This is a reason why ever cartel is considered inherently unstable.
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