3. Table: Demand for Breakfast Cereal Price of Cereal Quantity of Cereal Demande

Question

3. Table: Demand for Breakfast Cereal Price of Cereal Quantity of Cereal Demanded (millions of boxes) (per box) $5.00 4.50 4.00 3.50 3.00 2.50 2.00 50 100 150 200 250 300 350 400 450 500 1.50 1.00 .50 0 Reference Ref 14-18 (Table: Demand for Breakfast Cereal) Look at the table Demand for Breakfast Cereal. Suppose that the marginal cost of producing cereal is zero. General Mills is the sole producer of breakfast cereal, how many boxes will the firm produce. what price will be charged, and how much revenue will be earned? B) Now assume that Kellogg enters the market, and the industry is now a duopoly with two equal-sized firms. If these firms agree to split the monopoly output equally, how much revenue will each firm earn under the agreement? C) If General Mil punishment, will it? Analyze the price effect and quantity effect for General Mills of producing million more boxes. Is can cheat on this agreement by producing 50 million more boxes of cereal without

Explanation / Answer

A) Given that MC = 0, monpolist will produce till MR = 0 or TR is maximum. This is seen from the table that MR = 0 when Q = 250 million. Hence it will charge a price of 2.50 and revenue will be 625 million

b) Collusion will split the monopoly production and revenue so each firm gets 625/2 = 312.50 million as a share in revenue

c) Yes it will such a step will increase market quantity to 300 million and so market price will fall to $2. General Millls now earn 175*2 = $350 million while Kellogg will earn 125*2 = $250 million. So General Mills has an incentive to cheat

Price effect = (2.50 - 2.00)*250 million = 125 million and quantity effect = (300 - 250)*$2 = $100 million.

Price Quantity TR MR 5 0 0 4.5 50 225 4.5 4 100 400 3.5 3.5 150 525 2.5 3 200 600 1.5 2.5 250 625 0.5 2 300 600 -0.5 1.5 350 525 -1.5 1 400 400 -2.5 0.5 450 225 -3.5 0 500 0 -4.5

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