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?
What will be an ideal response?
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.
You might also like to view...
Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ________ channel
A) balance sheet B) bank lending C) cash flow D) unanticipated price level
Judging from this graph, which of the following happens if supply increases and demand remains unchanged?
a. Price falls and quantity rises.
b. Price falls and quantity becomes indeterminate.
c. Price becomes indeterminate and quantity rises.
d. Price increases and quantity falls.