(Scenario: Two Identical Firms) Use Scenario: Two Identical Firms.When the firms collude and produce the profit-maximizing output,what is the profit earned by each firm if they split production equally? 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) $360,000
B) $180,000
C) $15,000
D) $25,000

Question

Grace Hewat · Accepted Answer

Final Answer : B, Explanation :  When the firms collude and produce the profit-maximizing output, they produce where marginal cost (MC) equals marginal revenue (MR) and split production equally.The market demand function can be rewritten as P = 1,250 - 0.25Q.To find the quantity demanded at the profit-maximizing price, we set MR equal to MC:1,250 - 0.5Q = 650Solving for Q, we get Q = 1,200.Each firm produces 600 units of the good.To find the price, we substitute Q back into the demand function:P = 1,250 - 0.25(1,200) = $900 per unit.Each firm earns a profit of (900 - 650) x 600 = $150,000.Therefore, the total profit earned by both firms is $150,000 x 2 = $300,000.Since they split production equally, each firm earns $300,000/2 = $180,000.

Definitions

Learning Objectives

Learning Objectives

Related questions