An oligopoly producing a homogeneous product is composed of three firms that act
ID: 1246227 • 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
If firms collude, the three firms will act as one and thus act as a monopoly. This means that they will also behave like a monopoly in their setting of price and quantity. We see that a monopoly will want to produce where marginal cost equals marginal quantity - this happens at an output of five. Because the firm is now a monopoly, it can charge the monopoly price which is the demand - and that's a price of 180. Oligopolies could also charge this much, but because the price they charge depends on the price the other firms in the oligopoly market charge, they may not be able to charge as much as 180. Lastly, profit is simply the revenue minus the cost, which in this case is 5*180 (revenue) minus 340, or 900 minus 340 = 560.