Question

QUESTION 1

1. Identify several cartels in the world and determine to what extent they are successful.
2. The ability of oligopolistic firms to engage successfully in collusion depends on a number of factors. Identify and examine at least FIVE (5) of these factors

QUESTION 2

Muhibah Group manufactures smart phones that can be sold directly to retail outlets or to the Mother Company for further processing and eventual sale by them as a completely different model. The demand function for each of these markets is:

Retail Outlets: P₁ = 60 - 2Q₁

Mother Company: P₂ = 40 - Q₂

where P₁ and P₂ are the prices charged and Q₁ and Q₂ are the quantities sold in the respective markets.

Muhibah’s total cost function for the manufacture of this smart phone is:

TC = 10 + 8(Q₁ + Q₂)

1. Determine Muhibah’s total profit function.
2. What are the profit-maximising price and output levels for the product in the two markets?
3. At these levels of output, calculate the marginal revenue in each market.
4. What are Muhibah’s total profits if the firm is effectively able to charge different prices in the two markets?
5. Calculate the profit-maximising level of price and output if Muhibah is required to charge the same price per unit in each market. What are Mubihah’s profits under this condition?                                                                                                           

Answer 1

1.

A.

The biggest and most successful cartel is the cartel of nations named as OPEC nations. These nations decide the quantity of oil to be produced and its pricing and affected the world economy strongly. Though the impact has been reduced of late, but it still works to the greater extent. The second example of cartel is the cartel of Medellin in Colombia. It gave an organized shape to the cartel that worked strategically to be successful in Columbia. The third example of cartel is cement industry in India in the development phase after the independence of the country. It also remained successful before the liberalization started in 1991. Afterwards, the cartel in cement industry vanished. The fourth example of cartel is investment banking companies who work as cartel, though they never accept it as cartel is illegal. Investment banking companies also remain successful while abiding the law and show that they encourage fair competition.

B.

The first factor is the presence of one big firm as a leader and other following firms. It is the basis of cartel and peace among the different firms are maintained to make collusion to be feasible. The second factor is the barriers to entry where the limited number of firms operate and can artificially decrease the supply and increase the price. The third factor is the interdependence of the firms upon each other even if they don't trust each other. It is the necessary condition to be remain them in collusion. The fourth factor is similar nature of products to be produced and there is little difference in the products. It makes consumers not able to prefer one product over the other products. It makes collusion to be successful. The fifth factor is the remain honest to be successful and earn long run positive economic profit. It will make them to be in collusion and work together.

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