Asked by Scott Johnston on Jun 09, 2024
Verified
(Table: Demand Schedule of Gadgets) Use Table: Demand Schedule of Gadgets.The market for gadgets consists of two producers,Margaret and Ray.Each firm can produce gadgets with no marginal cost or fixed cost.Suppose that these two producers have formed a cartel,agreed to split production of output evenly,and are maximizing total industry profits.If Margaret decides to cheat on the agreement and sell 100 more gadgets but Ray continues to sell 250 gadgets,Ray's profits will be:
A) $1,400.
B) $1,250.
C) $1,000.
D) $400.
Marginal Cost
The financial outlay required to produce an additional unit of a product or service.
Fixed Cost
Expenses that do not change with the amount of goods or services produced, such as rent, salaries, and insurance premiums.
Cartel
An agreement among competing firms to control prices or exclude entry of a new competitor in a market.
- Comprehend the principles behind the formation of cartels and the consequences of dishonesty among cartel members in duopoly markets.
- Investigate the influence of increased production on both market price levels and the profitability of individual enterprises, considering marginal expenses.
Verified Answer
AW
Ariane WrightJun 10, 2024
Final Answer :
C
Explanation :
If Margaret decides to cheat and sell an additional 100 gadgets, then the total quantity produced would be 750 (500 from Ray + 350 from Margaret). Using the demand schedule, we find that at a quantity of 750, the price would be $3.50 per gadget.
If Ray continues to produce 250 gadgets, then his total revenue would be:
$3.50 x 250 = $875
His total costs would still be zero, so his profits would be:
$875 - $475 = $400
Therefore, Ray's profits would be $400 if Margaret decides to cheat.
If Ray continues to produce 250 gadgets, then his total revenue would be:
$3.50 x 250 = $875
His total costs would still be zero, so his profits would be:
$875 - $475 = $400
Therefore, Ray's profits would be $400 if Margaret decides to cheat.
Learning Objectives
- Comprehend the principles behind the formation of cartels and the consequences of dishonesty among cartel members in duopoly markets.
- Investigate the influence of increased production on both market price levels and the profitability of individual enterprises, considering marginal expenses.