Question

Q1-Suppose that the inverse market demand for pumpkins is given by ?=$10−0.05? . Pumpkins can be grown by anybody at a constant marginal cost of $1.

1- Suppose Linus could grow pumpkins at a marginal cost of $0.95. What would be Linus's price and quantity? (Hint: assume Linus will price his product so as to undercut Lucy by the least amount possible.)

PLinus = $----- QLinus = -------

2- In this scenario, Lucy's output would

a- be unaffected

b- fall to zero

Q2- In the context of a cartel, a firm that "cheats" will

a- produce a quantity greater than what was agreed upon.

b-charge a price below its own marginal cost.

c- charge a price higher than what was agreed upon.

d- produce a quantity less than what was agreed upon.

Answer 1

P = 10 - 0.05Q

MC = 1

1) In case of Linus, MC = 0.95

Equilibrium quantity and price will be at

P = MC

10 - 0.05Q = 0.95

-0.05Q = 0.95 - 10

0.05Q = 9.05

Q = 181

Putting this value into Demand equation, we get

p = 10 - 0.05*181

P = 10 - 0.95

P = 0.95

2) It is a case of perfect competition, so if price of Linus is less than Lucy than lucy output will fall to zero because everyone will purchse from linus rather than lucy.

Q2) In the context of a cartel, a firm that "cheats" will

a- produce a quantity greater than what was agreed upon. because then the cheater firm will earn more profit. profit is maximised when the cheating firm produce greater output while receiving the Cartel price.