Assume there are only two producers of tennis rackets: Wilson and Prince. The ma
ID: 1179677 • Letter: A
Question
Assume there are only two producers of tennis rackets: Wilson and Prince. The market demand for tennis rackets is depicted by the algebraic formula P = 100 - Q, where P stands for price and Q stands for quantity of rackets. If the market were monopolized, the resulting formula for the monopolist's marginal revenue would be MR = 100 - 2Q, where MR stands for marginal revenue. Assume that both producers face a constant marginal cost of $40 and that there are no fixed costs. Assume there are only two producers of tennis rackets: Wilson and Prince. The market demand for tennis rackets is depicted by the algebraic formula P = 100 - Q, where P stands for price and Q stands for quantity of rackets. If the market were monopolized, the resulting formula for the monopolist's marginal revenue would be MR = 100 - 2Q, where MR stands for marginal revenue. Assume that both producers face a constant marginal cost of $40 and that there are no fixed costs. If Wilson and Prince form a cartel and each agrees to produce one half of the monopolist's profit-maximizing output, how many rackets would each manufacturer produce? When Wilson and Prince collude so as to maximize their combined profits, what is the price of tennis rackets (in dollars)? How much profit (in dollars) does each manufacturer earn when they agree to produce the monopoly outcome and divide the profit evenly? When Prince produces one half of the monopoly output and Wilson cheats by producing one more racket than allowed under the collusive agreement, how much profit (in dollars) does Wilson earn? The collusive agreement in which Wilson and Prince split production evenly and maximize joint profits will be easy to sustain because each firm has an incentive to produce the agreed output, regardless of what the other firm does. When both firms decide to cheat and to produce one more racket than specified in their collusive agreement, how much profit (in dollars) does each firm earn?
Explanation / Answer
A monopolist maximizes profit by producing a quantity such that Marginal Revenue = Marginal Cost.
So for this case Q = 30. So each would produce half that or 15 rackets.
P = 100 - Q, so P = 70
Each compnay makes a profit of $30 per racket (MR-MC), and each company produces 15 rackets, so they each make a profit of $450.