11. The market for olive oil in New York City is controlled by two families, the

Question

11. The market for olive oil in New York City is controlled by two families, the Sopranos and the Contraltos. Both families will ruthlessly eliminate any other family that attempts to enter the New York City olive oil market. The marginal cost of producing olive oil is constant and equal to $40 per gallon. There is no fixed cost. The accompanying table gives the market demand schedule for olive oil Quantity of olive oil demanded (gallons) 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 Price of olive oi (per gallon) $100 90 80 70 60 50 40 30 20 10 Suppose the Sopranos and the Contraltos form a cartel. For each of the quantities given in the table, calculate the total revenue for their cartel and the marginal revenue for each additional gallon. How many gallons of olive oil would the cartel sell in total and at what price? The two families share the market equally (each produces half of the total output of the cartel). How much profit does each family make? A.

Explanation / Answer

The cartel would produce where the marginal revenue is equal or greater than marginal cost. This happens at a price of 80 where MR>MC where q=2000 beyond this quantity the marginal revenue is less than the marginal cost.

Total revenue for each family will be 1,000×$80=$80,000. The marginal cost is 40 and fixed costs are zero so total cost is $40,000. So each family makes a profit of $80,000$40,000=$40,000.

Price of Olive oil Quantity of Olive oil TR=PQ MR=Change in TR/Change in Quantity MC 100 1000 100000 100 40 90 1500 135000 70 40 80 2000 160000 50 40 70 2500 175000 30 40 60 3000 180000 10 40 50 3500 175000 -10 40 40 4000 160000 -30 40 30 4500 135000 -50 40 20 5000 100000 -70 40 10 5500 55000 -90 40

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