Suppose that market demand can be represented as p = 100 - 2Q. There are 10 identical firms producing an undifferentiated product, each with the total cost function TC = 50 + q2. Compare the competitive outcome with the cartel outcome
What is the individual firm's incentive to cheat on the cartel?
Each firm has MC = 2q, so that market supply is Q = 5p or joint MC = Q/5. As a cartel, they set joint MR = joint MC yielding 100 - 4Q = Q/5 or 100 = 4.2Q. Q = 23.8, and each firm will produce 2.38 units. The cartel price is 100 - 2(23.8 ) = $52.38. Each firm has the incentive to cheat because its marginal cost is $4.76 and the market price is $52.38. In a competitive market, supply equals demand. p = 100 - 2(5p) or 11p = 100. Price equals $9.09 and output equals 45.45 units.
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Which of the following is a basic assumption of an economic analysis?
a. Private property rights exist and are secure b. A controlled market structure is the key to economic growth. c. In a free market, resources are owned by the government. d. There are no private property rights under a free market economy. e. Social well-being is the prime objective of an entrepreneur.
A horizontal supply curve of labor implies that
a. lower wages are required to attract more employees b. higher wages are required to attract more employees c. MPP is constant d. any quantity of workers can be hired at the same wage e. the total labor cost curve is horizontal