An oligopoly producing a homogeneous product is composed of three firms that act
ID: 1246083 • Letter: A
Question
An oligopoly producing a homogeneous product is composed of three firms that act like a cartel. Assume that these three firms have identical cost schedules. Assume also that if any one of these firms sets a price for the product, the other two firms charge the same price. As long as they all charge the same price they will share the market equally; and the quantity demanded of each will be the same. Below are the total-cost schedule of one of these firms and the demand schedule that confronts it when the other firms charge the same price as this firm. Complete the marginal-cost and marginal-revenue schedules facing the firm.Output Total Cost
Marginal Cost
Price Quantity Demanded
Marginal Revenue
0
$ 0
1
60
$______
$ 260
1
$______
2
100
240
2
3
160
220
3
4 240
200 4 5 340
180 5 6 460
160 6 7
600
140
7
8 760
120
8 Thank You
An oligopoly producing a homogeneous product is composed of three firms that act like a cartel. Assume that these three firms have identical cost schedules. Assume also that if any one of these firms sets a price for the product, the other two firms charge the same price. As long as they all charge the same price they will share the market equally; and the quantity demanded of each will be the same. Below are the total-cost schedule of one of these firms and the demand schedule that confronts it when the other firms charge the same price as this firm. Complete the marginal-cost and marginal-revenue schedules facing the firm.
Output Total Cost
Marginal Cost
Price Quantity Demanded
Marginal Revenue
0
$ 0
1
60
$______
$ 260
1
$______
2
100
240
2
3
160
220
3
4 240
200 4 5 340
180 5 6 460
160 6 7
600
140
7
8 760
120
8 Thank You
Output Total Cost
Marginal Cost
Price Quantity Demanded
Marginal Revenue
0
$ 0
1
60
$______
$ 260
1
$______
2
100
240
2
3
160
220
3
4 240
200 4 5 340
180 5 6 460
160 6 7
600
140
7
8 760
120
8
Explanation / Answer
Well, first with the marginal cost. We can simply find that by seeing how much additional cost you gain when you have one more unit of output. Thus, we see for the first unit, we are going from $0 to $60, thus the marginal cost at the first unit is $60. By the same method, we find the marginal cost for an output of 2 to 8. Output=1, MC=60 Output=2, MC=40 Output=3, MC=60 Output=4, MC=80 Output=5, MC=100 Output=6, MC=120 Output=7, MC=140 Output=8, MC=160 Then, we have to find marginal revenue. To find that, we first need to find total revenue. We know that total revenue is simply the price times the quantity. So at the first unit, we have $260 (price) times 1 (quantity), which gives us $260 for total revenue. We do this for output from 1-8: Output=1, TR=260 Output=2, TR=480 Output=3, TR=660 Output=4, TR=800 Output=5, TR=900 Output=6, TR=960 Output=7, TR=980 Output=8, TR=960 Now, we can find marginal revenue since marginal revenue is simply additional revenue brought by an extra unit of output. We know that at output=0, revenue is 0. So marginal revenue for output units 1-8 looks like: Output=1, MR= 260 Output=2, MR= 220 Output=3, MR= 180 Output=4, MR= 140 Output=5, MR= 100 Output=6, MR= 60 Output=7, MR= 20 Output=8, MR= -20