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3. Working with Numbers and Graphs Q4

3. Working with Numbers and Graphs Q4 


The following graph shows the marginal cost (MC) and average total cost (ATC) and the initial demand (Di) curves of a perfectly competitive firm. Suppose this firm forms a cartel with other firms in the industry. Because of the cartel agreement, it has been assigned a production quota of 30 units. The cartel price is $70 per unit of output. 


You may use the purple rectangle (diamond symbols) to help you answer the questions that follow. You will not be graded on any changes you make to the graph.

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 If the firm adheres to the cartel agreement, its profits will be _______ 

 If the firm breaks the cartel agreement and produces 85 units, its profits will be _______ 



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Answer #1

If the firm adheres to the cartel agreement, then profit=

Profit= Total revenue - total costs

Total revenue= P x Q

Total costs= Cost per unit x Q

Total revenue

P= $70 per unit

Cost per unit= $ 45 per unit

Q= 30 units

Revenue= $70 x 30=$2,100.

Cost= $45 x 30= $1,350.

Profit= $2,100 - $1,350= $ 750.

If the firm breaks away from the cartel

P= $70 per unit.

Q= 85 units

Revenue= $70 x 85= $5,950.

Cost = $35 per unit

Q= 85 units

Total cost= $35 x 85=$2,975

Profit=$5,950 - $2,975= $2,975

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