Microeconomics - Oligopoly

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.

  1. 👍
  2. 👎
  3. 👁
  1. The two firms agree to act as a monopolist. Sinc MC is zero for both firms, they will produce where MC=MR=0 (where MR is the combined MR for both firms). And when MR=0, the elasticity of demand is -1. So b is true.

    Now at this optimal production point, each firm producing its quota, if a firm decides to produce one more unit the combined MR would become negative. However the overall decline in MR is shared by both firms, while the increase revenue from the one extra unit goes entirely to the cheating firm; profits of the cheating firm go up. So, a is true.

    If the firms suddenly switch to a Cournot model, this is the same as scenario a) -- each firm will treat the other's firm's output as fixed. Each firm will want to increase production. So c) is false.

    cournot firms are competitors, and since I contend c) is false, d) must also be false.

    1. 👍
    2. 👎

Respond to this Question

First Name

Your Response

Similar Questions

  1. Math

    Three individuals form a partnership and agree to divide the profits equally. X invests $4,500, Y invests $3,500 and Z invests $2,000. If the profits are $1,500, how much less does X receive than if the profits were divided in

  2. Economics

    An industry currently has 100 firms, all of which have fixed costs of $16 and avg. variable cost as follows: Q Avg. Variable Cost ($) 1 1 2 2 3 3 4 4 5 5 6 6 a. Compute marginal cost and avg. total cost. b. the price is $10. what

  3. Economics

    Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen to a. Your firm's costs of

  4. economics

    perfectly competitive industry. Each firm having identical cost structures. long-run average cost is minimized at an output of 20 units. Minimum average cost is $10 per unit. total market demand is Q=1500-50P. What is the long-run

  1. Microeconomics

    A perfectly competitive industry has a large number of potential entrants. Each firm has an identical cost structure such that long run average cost is minimized at an output of 10 units (qi=10 ). The minimum average cost is R5

  2. economics

    This is going to be really long, but I want to see if my answers are correct. This is problem number 10.10 in my Intermediate Microeconomics book. A perfectly competitive painted necktie industry has a large number of potential

  3. math

    Three individuals form a partnership and agree to divide the profits equally. X invests $4,500, Y invests $3,500 and Z invests $2,000. If the profits are $1,500, how much less does X receive than if the profits were divided in

  4. managerial economics

    The cost function for a firm is given by TC = 500 + Q2. The firm sells output in a perfectly competitive market and other firms in the industry sell at a price of $100. a) What price should the manger of this firm put on its

  1. math

    Three individuals form a partnership and agree to divide the profits equally. X invests $4,500, Y invests $3,500 and Z invests $2,000. If the profits are $1,500, how much less does X receive than if the profits were divided in

  2. Pre-Algebra

    Three individuals form a partnership and agree to divide the profits equally. X invests $9,000, Y invests $7,000, Z invests $4,000. If the profits are $4,800, how much less does x receive compared to having the profits divided in

  3. Econ

    A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it a. maximizes total revenue for firms and maximizes the quantity supplied of the product. b. maximizes the

  4. economics

    suppose a competitive market consists of identical firms with a constant long run marginal cost of $10. Suppose the demand curve is given by q=1000-p a)What are the price and quantity consumed in the long run competitive

You can view more similar questions or ask a new question.