a. Figure 12.la shows demand, marginal revenue, and marginal cost curves for an
ID: 1156612 • Letter: A
Question
a. Figure 12.la shows demand, marginal revenue, and marginal cost curves for an industry composed of 100 identical small firms. Assume that the industry is organized as a cartel. What is the profil-maximizing quantity of output for the industry? The profil-maximizing price the 100 members of the cartel agree to share the profit-maximizing quantity of output equally what is the output quota allowed to each firm? b. Figure 12.lb shows cost curves for one of the 100 identical firms making up the cartel. If the firm holds production to its 100 unit quota, how much profit will it earn? What will the relationship between marginal cost and marginal revenue be for this firm at 100 units of output? c. Suppose that this firm were to treat the cartel's profit-maximizing price of $1.20 per unit as a given. If it acted like a price taker with a fixed $1.20 per unit price, what would its profit- maximizing level of output be? How much profit would it make? d. Does this example tell you anything about the temptation of an individual member of a cartel to cheat on the cartel's agreed output quotas? Explain.Explanation / Answer
a) Since the industry is behaving as a cartel therefore, the profit maximizing level of output will be where marginal revenue curve cuts marginal cost curve i.e MR =MC. So the profit maximizing level of output will be 10,000 units. The corresponding level of price will be obtained using the demand curve. The profit maximizing level of price is $1.20. Output quota to each firm will be 10000/100 = 100 units.
b) Profit to each firm will be
Profit = (Price –ATC)*100
Profit = (1.20 – 0.90)*100 = 0.3*100 = $30
Marginal revenue and marginal cost will be equal.
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