An oligopoly producing a homogeneous product is comprised of three firms that ac
ID: 1246094 • Letter: A
Question
An oligopoly producing a homogeneous product is comprised 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 CostMarginal Cost
Price
Quantity Demanded
Marginal Revenue
0
$ 0
1
180
$_____
$ 780
1
$_____
2
300
720
2
3
180
660
3
4 720 600 4
5 1020 540 5
6 1380 480 6
7
1800
420
7
8 2280 360 8
Thank You
An oligopoly producing a homogeneous product is comprised 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
180
$_____
$ 780
1
$_____
2
300
720
2
3
180
660
3
4 720 600 4
5 1020 540 5
6 1380 480 6
7
1800
420
7
8 2280 360 8
Thank You
Output Total Cost
Marginal Cost
Price
Quantity Demanded
Marginal Revenue
0
$ 0
1
180
$_____
$ 780
1
$_____
2
300
720
2
3
180
660
3
4 720 600 4
5 1020 540 5
6 1380 480 6
7
1800
420
7
8 2280 360 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=180 Output=2, MC=120 Output=3, MC= 180 (I'm assuming you meant 480 instead of 180 here) Output=4, MC= 240 Output=5, MC= 300 Output=6, MC=360 Output=7, MC= 420 Output=8, MC= 480 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=780 Output=2, TR=1440 Output=3, TR=1980 Output=4, TR= 2400 Output=5, TR= 2700 Output=6, TR= 2880 Output=7, TR= 2940 Output=8, TR= 2880 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= 780 Output=2, MR= 660 Output=3, MR= 540 Output=4, MR= 420 Output=5, MR= 300 Output=6, MR= 180 Output=7, MR= 60 Output=8, MR= -60