Assume that two firms operate in a market which has a demand function Q = 12 - 1

Question

Assume that two firms operate in a market which has a demand function Q = 12 - 1P. Firm 1's output is designated by q1 and firm's 2's output is designated by q2. Because there are only two firms, the output on the market Q is equal to the sum of the two firms' outputs q1 and q2 respectively. It is important to note that, in this market, each of the two firms has a substantial impact on the market price. It is not like the model of pure competition where there are a sufficiently large number of firms that each firm has such a negligible impact on price that it takes the market price as given.
If firm 1 produces 2 units and firm 2 produces 4 units for sale, what is the total amount spent on the good in the market?

Select one:

a. $32

b. $20

c. $36

d. none of the above

Explanation / Answer

Total Amount Spent Will be

$6 x (2+4)=$36

Q=12-1P

2+4=12-1P

P=$6

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