Suppose that there are only two firms in the petroleum market They give you some

Question

Suppose that there are only two firms in the petroleum market They give you some information about the petroleum market and you have to answer the questions below.

# Demand Equation: P = 110 – Q

# For each firm marginal cost MC = $20.

# [Quantity of outcome (qSA), Price (pSA), Profit (SA)] , [Quantity of outcome (qKPC ), Price (pKPC), Profit ( KPC)].

# Q = qSA + qKPC

1-Suppose that the firms cooperate to act as a monopoly and want to form OPEC cartel in the market, then:                                                                                                                                  

What do you think the objectives of this cartel?

Calculate the following in monopoly market and compare them with previous results:

i.Quantity of output.

ii.Price.

iii.Profit to each firm.

2- Suppose that one firm is expected to produce the same quantity in cartel contract. But another firm wanted to cheat, then:                                                                                                     

In your opinion, what are the main incentives that push the firm to deviate and cheat?

Calculate the following for both firms:

Quantity of output.

Price.

Profit to each firm.

Explain the previous results.

3- Summarize this case in the pay-off matrix and decide what is the right behavior each firm will take in the market?                                                                                                                   

Explanation / Answer

1) We have market demand ,P = 110-Q

The objective of this cartel , is to acts as a monopoly and charge the price which maximize their profits and produce the profit maximizing output equally .

after cartel, both firms marginal cost add = MC of cartel = 20+20 =$40

TR = 110Q - Q2

MR = 110 - 2Q

now MR=MC

110 - 2Q = 40

2Q = 70 or Q = 35

so, P = 110-35 = $70

so, profit maximizinf price of cartel is $70 and output = 35

profit = TR -TC

profit = 70 * 35 - 40*35

profit = 2450 - 1400 = $1050

so profit of each firm = $525.

In cartel, each firm produce = 45 output

and price charge , P = 110 -45 = $65

profit in cartel = TR - TC

profit = 65*45 - 45*20

profit = 2925 - 900 =$2025

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