Question

Suppose that Firm A and Firm B are two of the largest producers of a special pool-cleaning robot. Suppose that the marginal cost of making such a robot is constant at $1,000 per unit, and there is no start-up cost. The demand for the robot is described by the following schedule.

Price (in 000s)	Quantity (in 000s)	TR (in 000s)	MR (in 000s)	TC (in 000s)	MC (in 000s)	Profit (in 000s)
8	6
7	7
6	8
5	9
4	10
3	11
2	12
1	13

a.         Complete the columns for total revenue, marginal revenue, total cost, marginal cost, and profit.

b.         If the market for the robots was perfectly competitive, what would the price and quantity be?

           

c.         If there were only one supplier of robots, what would the price and quantity be?

  

d.         If two firms formed a cartel, what would be the price and quantity? If two firms split the market evenly, what would be Firm A’s production and profit?

e.     What would happen to Firm A’s profit if it increased its production by 1,000 while Firm B stuck to the cartel agreement?

Answer 1

Price	Quantity	TR(P*Q)	MR(change in TR)	TC(MC*Q)	MC	Profit(TR-TC)
(in 000s)	(in 000s)	(in 000s)	(in 000s)	(in 000s)	(in 000s)	(in 000s)
8	6	48		6	1	42
7	7	49	1	7	1	42
6	8	48	-1	8	1	40
5	9	45	-3	9	1	36
4	10	40	-5	10	1	30
3	11	33	-7	11	1	22
2	12	24	-9	12	1	12
1	13	13	-11	13	1	0

b) If the market was competitive, the market will set P=MC

Price = 1000

Quantity = 13000

c) If there were only one supplier, the market will set MC=MR

Price = 7000

Quantity = 7000

d) When a cartel is formed, they act as a monopoly and set MC=MR

P=7000

Q=7000

Firm A production = 7000/2 =3500

Profit = (7000-1000)*3500 = 21 million

e) If Firm A increases its production by 1000 units, total output increases to 8000 and price decreases to 6000

Profit = (6000-1000)*4500 = 22.5 million