An oligopoly producing a homogeneous product is composed of three firms that act
ID: 1246194 • 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
B) If the firms collude to maximize joint profits, what would be the industry price, output, and profit?
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
B) If the firms collude to maximize joint profits, what would be the industry price, output, and profit?
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
Here you actually want to use the other table that had everything multiplied by three. Since the three firms in oligopoly colluding will create a monopoly (one firm). We see from the other table I did (where everything is 3x) that the marginal cost and marginal benefit still meet at an output of 5 (MC=300=MR). Thus, we see that the new firm (the three colluded oligopoly firms which creates a monopoly, which is now also the industry) will produce at 5 units at a price of 540. The profit then is the total revenue (5*540=2700) minus the total cost (1020) which is 1680.