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In: Economics

Firm A, a member of a two-firm cartel (comprising Firm A and Firm B) has hired...

Firm A, a member of a two-firm cartel (comprising Firm A and Firm B) has hired you as a consultant to investigate if the cartel operation is optimizing profits. After some research you have identified that the demand facing the cartel is Q = 56 – 2P which can be written equivalently as P=28 – 0.5Q. Q is quantity and P is price. The marginal revenue (MR) then becomes MR = 28 – Q. Also, the marginal cost for firm A (MCA) is given by MCA = 0.5Q, and marginal cost for Firm B (MCB) is given by MCB = Q. Therefore the marginal cost for the cartel is MCC = Q/3. The cartel is currently producing 21 units in total and selling at price of 17.5 dollars a unit. The current agreement allocates output equally between the cartel members (that is 10.5 units each).

(a). If the cartel wishes to maximize its profits, explain and compute how the output should be allocated between the two members

(b). Use the information given and results in (a) above to explain some key problems likely to trouble this cartel .

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Expert Solution

Rahul Sunny answered 8 months ago
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