Question

Suppose that the marginal cost of mining gold is constant at $300 per ounce and the demand schedule is as follows:

PRICE (per oz.)	QUANTITY (per oz.)
$1000	1000
$900	2000
$800	3000
$700	4000
$600	5000
$500	6000
$400	7000
$300	8000

a.) If the number of supplies is large, what would be the price and quantity?

b.) If there is only one supplier, what would be the price and quantity?

c.) If there are only two suppliers and they form a cartel, what would be the price and quantity?

d.) Suppose that one of the two cartel memebers in part (c) decides to increase its production by 1,000 ounces while the other member keeps its production constant. What will happen to the revenues of both firms?

Answer 1

Write the formulae as follows: TR PricexQuantity ATR MR- AQ Calculate the marginal and total revenue as follows: A D MR Price Quantity TR 1 1000 1000 1000000 2 900 2000 1800000 800 800 3000 2400000 600 4 700 4000 2800000 400 5 600 5000 3000000 200 6 500 6000 3000000 0 7 400 7000 2800000 -200 8 2400000 300 8000 -400 9 Represent the formula excel sheet as follows A C Price MR Quantity 1000 2000 3000 4000 TR 1 - A2 *B2 - A3 * B3 - A4*B4 - A5 * B5 - A6 * B6 - A7 *B7 - A8 *B8 - A9 *B9 2 1000 ( C3- C2 ) ( B3-B2) |-C4-С3)(В4-В3) ЕC5-C4)(B5-B4) |-(C6-C5) (B6-B5) (C7-C6) (B7-B6) |=(C8-C7) (B8-B7) - (C9-C8)/(B9-B8) 3 900 4 800 5 700 5000 6 600 6000 7000 8000 7 500 8 400 9 300 a If the number of supplies is large, the price would be $300 and the quantity is S,000 oz b) only equal to marginal If there is supplier, then the price will be at the point where marginal one revenue 1s cost is $700 and quantity supplied is 4,000 Thus, the price OZ.

As there are two sellers, quantity of 4,000 oz will be divided equally among them Thus, if there are two sellers, price is $700, and quantity is 2,000 oz for each seller d) As the quantity increases, price declines and that leads to decline in the total revenue of the other firms Thus, the firm that increases production gets higher revenue, and the other firm's revenue falls