In a perfect competitive market, industry demand is P = 850 - 2Q, and industry s

Question

In a perfect competitive market, industry demand is P = 850 - 2Q, and industry supply is P = 250 + 4Q (supply is the sum of the marginal cost curves of the firms in the industry). Assume that all the firms collude to form a single monopoly firm. There is no change in demand or cost conditions of the industry.

What are the economic effects (price and quantity) of such a change in industry structure?

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Explanation / Answer

Under competitive conditions, optimum level of output occurs at demand = supply i.e. P = 850 - 2Q = 250 + 4Q => Q = (850-250)/6 = 100 and P = 850 - 2*100 = 650 under monopolistic conditions, MC = 250+4Q R = (850-2Q)*Q MR = 850 - 4Q MR = MC => 850-4Q = 250+4Q => Q = (850-250)/* = 75 and P = 850 - 2Q = 850-150 = 700 So under monopoly Q is reduced and P has increased. (ANSWER)

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