Question

You are working for the Federal Trade Commission and you have been assigned to investigate the market for high-end large screen televisions. Firms can adjust quantity easily and generally compete on price. The monthly demand curve is estimated to be: ? = 15,000 − ? And based on industry reports, you believe the marginal cost of each TV is $1,000.

a) What is the collusion price that maximizes total profit?

b) What would the perfect competition price be?

c) If you see average prices of $6,999 that occasionally drop to less than $1,500, how would you interpret that?

Answer 1

a)

The demand for TV is

The MR for the same is

When the firm colludes, they set a price that maximizes joint profit. Then they set the monopoly price. At monopoly equilibrium MR=MC. Hence, the collusive outcome is

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b)

The perfectly competitive outcome is to set price equal to marginal cost. Then in competitive outcome

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c)

The price varies between $6999 to $1500 occasionally. This implies the firms that competes in the market maintain a price near collusive outcome of $8000. This drops to competitive outcome if the existing firm wants to evade competition or any new firm entering the market charges a price near competitive outcome.