Question

1. If a cartel succeeds in maintaining the cartel price but cannot prevent the entry of new firms into the industry: a. the industry’s total output level will rise. b. entry continues until the equilibrium average cost equals the fixed cost. c. entry continues until the equilibrium marginal cost equals the fixed price. d. All of the above are correct.

2. For a competitive firm, marginal revenue equals average revenue because the: a. firm’s supply curve is horizontal. b. industry’s demand curve is horizontal. c. demand curve facing the firm is horizontal. d. industry’s supply curve is horizontal. e. firm cannot differentiate its product.

Answer 1

1. If a cartel succeeds in maintaining the cartel price but cannot prevent the entry of new firms into the industry. So when new firms enter the industry it is obvious that the total output will rise but upto what level, in this regard we can think of a competitive market where the output is produced at the level where MR=MC. Here since the price is fixed sk it is the MR, So the entry will continues until the equilibrium marginal cost equals the fixed price. So according to me the correct answer must be both a and c.

2. For a competitive firm, marginal revenue equals average revenue because in a competitive market the firms do not have any market power but they can only produce and sell goods at the price decided by the demand and supply interections in the market.

So for a firm the price is fixed and it can supply as much ad it wants at that fixed price. This means that the correct answer will be c. demand curve facing the firm is horizontal.