Question

2. Suppose the owners of the two firms meet together secretly and agree to form a cartel. They choose a total level of production that maximizes their joint profits. They agree to split production and thus profits) equally (a) Suppose that both firms abide by their secret agreement. How much will each firm produce? What is the market price? What are the profits of each firm? (b) Suppose that Firm One decides (in a sneaky, underhanded way) to produce more output than the agreed amount. Given the production level of Firm Two, what amount of output would maximize Firm One's profits? Assuming that Firm Two actually produces the amount agreed upon in part i), what are Firm One's profits when it double-crosses the other firm? (c) Compare Firm l's profit in part i and part ii. Does firm 1 have an incentive to deviate from the cartel?

Consider a market with demand function D(p)=10-p and firms with constant marginal cost MC=1. Assume that there is no fixed cost and thus C(q1)=q1and C(q2)=q2

Answer 1

D (p) = 10-P mama MR 10-20 Carred act as a monopoly 10-20 10-4.5] Peness - T₂ = 2.25(5.5-1) = lonlar Roma o TII = 100, -0,2 - 0, 0 - 0 To = 90 Bast response of frim 1. Q = 9-2.25 6.75 3.375 Deviating form will produce ouput = 3.375 Brui - lo-3-375-2.25 = 4.375 Deviating form (4.3757) 3.375 = 11.390625 Yes Greim 1 profit will increase be desating which leads makes an incentive for fivim I to deviate. or