(Scenario: Two Identical Firms) Use Scenario: Two Identical Firms.Suppose the two firms decide to cooperate and collude,resulting in the same amount of production for each firm.What is the profit-maximizing price and output for the industry? Scenario: Two Identical Firms
Two identical firms make up an industry in which the market demand curve is represented by Q = 5,000 - 4P,where Q is the quantity demanded and P is price per unit.The marginal cost of producing the good in this industry is constant and equal to $650.Fixed cost is zero.

A) P = $400,Q = 5,000
B) P = $950,Q = 1,200
C) P = $600,Q = 1,500
D) P = $300,Q = 2,000

Question

Eliska Brady · Accepted Answer

Final Answer : B, Explanation :  To find the profit-maximizing price and output for the industry when the firms collude, we first need to determine the total quantity supplied that maximizes industry profit. The market demand curve is Q = 5,000 - 4P. To maximize profit, the firms will set marginal revenue (MR) equal to marginal cost (MC). The marginal cost is given as $650. To find MR, we need to first find the inverse demand function, which is P = 1,250 - 0.25Q from the given demand equation Q = 5,000 - 4P by solving for P. To find MR, we then differentiate the total revenue (TR = P*Q) with respect to Q, but since we don't have a direct TR equation, we use the fact that MR is twice the slope of the demand curve due to the linear demand curve, leading to MR = 1,250 - 0.5Q. Setting MR equal to MC, we get 1,250 - 0.5Q = 650, solving for Q gives Q = 1,200 for the industry. Substituting Q = 1,200 back into the demand equation or its inverse form gives P = $950. Therefore, the profit-maximizing price and output for the industry when the firms collude are P = $950 and Q = 1,200.

Definitions

Learning Objectives

Learning Objectives

Related questions