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July 6, 2015

Homework Help: Microeconomics - Oligopoly

Posted by Anonymous on Thursday, December 10, 2009 at 1:17pm.

Two firms decide to form a cartel and collude in a way that maximizes industry profits. Each firm has zero production costs and each firm is given a positive output quota by the cartel. Which of the following statement(s) are NOT true.

(a) Each firm would want to produce more than its quota if it knew that the other would continue to produce at its quota.
(b) The price elasticity of demand will be -1 at the output level chosen.
(c) Output will be lower than if the firms behaved as Cournot firms.
(d) Output will be lower than if the firms behaved as competitors.

I pick (a) and (b) because (a) the problem is a shared monopoly meaning that the duopolists know that they earn more when they form a cartel, and (b) states that the firms will produce in the inelastic portion which is not true since they will have negative marginal revenues and total revenues.

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