Question

Squeaky Clean and Biobase are the only two producers of chlorine for swimming pools. The market demand for chlorine is P=32-2Q, where Q is measured in tons and P is dollars per ton. The corresponding marginal revenue curve is MR=32-4Q. Assume that chlorine can be produced by either firm at a constant cost of $16 per ton. 1) If the two firms collude and act like a monopoly, agreeing to evenly split the market, how much will each firm produce and what will the unit price be? How much profit will each firm earn? 2) Does Squeaky Clean have an incentive to cheat on this agreement by producing an additional ton of chlorine? Explain. 3) Does Squeaky Clean’s decision to cheat affect Biobase’s profit? Explain. 4) Suppose that both firms agree to each produce 1 ton more than they were producing in part (1). How much profit will each firm earn? Does Squeaky Clean now have an incentive to cheat on this agreement by producing another ton of chlorine? Explain.

Answer 1