Question

Use the information below for the next four questions (26-29). This market is a deeply and the demand schedule as well as the total reais provided below. The wumber of customers you see and the total revenue is for the total market, not for an individual firm. Asume MC - FC - 30 Price/moth Number of customer Total revenue 000 1.000 1,100 0.00 30.000 16.500 26. Let's suppose the two comple have an illegal cartel and market, they are producing 500 in total (300 each). Is there an incentive for one firm to break to arment and produce 100 more? A. No, the firm breaking neement will be losing more B. Y, as the firm breaking the rest will begin t o C. It makes no difference, as the revie will be the same D. It would depend on the FC & MC 27. Now, let's suppose the two companies are in producing 300 each. Familiarise your self with the table and notice that any se firm has an incentive to break the agree ment and produce 200 ore. In this case, how much more w e will the firm that is breaking the wreement make? A00 R $1.000 C. $2,300 D $3.000 E 500 28. Using the same information from question 27, what about the firms that kept the ment? How much we would that firm lose? A $7500 B .000 C 8.500 D. $9000 FS90 23. Suppose that the two firms get into a price war. Theoretically what is the lowest price that the two firms will reach? A SO B $0.01 C. $1 D. $15

Answer 1

Q26) B) Yes, as the firm breaking the agreement will be gaining revenue

At quantity 600 , total revenue equals 54,000 which is split equally between the two firms at 27,000

If one firm breaks agreement and starts producing 400. The total quanity now is 700 and price 75 at which total revenue equals 52,500.

New Revenue of firm producing 400 = 75 x 400 = 30,000

The firm breaking agreement will be gaining revenue

Q27) D) $3,000

Suppose the firm breaks agreement and produces 200 more. It is now producing 500 , total quantity is now 800 with price level 60.

Revenue of firm breaking agreement = 60 x 500 = 30,000

It was previously making 27,000

Now earns 3,000 more.

Q28) D) $9,000

Revenue of firm keeping contract = 60 x 300 = 18,000

Earlier this was making 27,000

Revenue loss = 27,000 - 18,000 = $9,000

Q29) A) $0

When the firms at a price war they start undercutting each other's price levels as the lower price would gain the market.

This goes on till price reaches their marginal cost. Which in this case equals 0