An oligopoly producing a homogeneous product is composed of three firms that act
ID: 1246183 • 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.Output Total Cost
Marginal Cost
Price
Quantity Demanded
Marginal Revenue
0
$ 0
1
60
$ 60
$ 260
1
$ 260
2
100
40
240
2
220
3
160
60
220
3
180
4 240 80 200 4 140
5 340 100 180 5 100
6 460 120 160 6 60
7 600 140 140 7 20
8
760
160
120
8
-20
A) What price would be charged, what output would be produced, and what profit would be made by this firm?
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.
Output Total Cost
Marginal Cost
Price
Quantity Demanded
Marginal Revenue
0
$ 0
1
60
$ 60
$ 260
1
$ 260
2
100
40
240
2
220
3
160
60
220
3
180
4 240 80 200 4 140
5 340 100 180 5 100
6 460 120 160 6 60
7 600 140 140 7 20
8
760
160
120
8
-20
A) What price would be charged, what output would be produced, and what profit would be made by this firm?
Thank You
Output Total Cost
Marginal Cost
Price
Quantity Demanded
Marginal Revenue
0
$ 0
1
60
$ 60
$ 260
1
$ 260
2
100
40
240
2
220
3
160
60
220
3
180
4 240 80 200 4 140
5 340 100 180 5 100
6 460 120 160 6 60
7 600 140 140 7 20
8
760
160
120
8
-20
Explanation / Answer
The firm will produce where marginal cost equals marginal revenue. Looking at the chart, we see that this happens at a output of 5 (Marginal cost=100=Marginal revenue). Thus, the firm will produce 5 units and charge a price of $180 (this too according to the chart). The profit will be basically total revenue minus total cost, in this case it's 180*5 (total revenue) minus 340 or 900 minus 340. Thus, total profit is 560.