There Are Only Two Firms in an Industry with Demand

question 91

Multiple Choice

There are only two firms in an industry with demand curves q₁ = 30 - P and q₂ = 30 - P.Both have no fixed costs and each has a marginal cost of 10 per unit produced.If they behave as profit-maximizing price takers,each produces 20 units and sells them at a price of 10 so that each firm makes zero economic profits.Suppose the two firms form a cartel.While firm 1 produces one-half of the profit-maximizing cartel output,firm 2 cheats and produces 5 units more.What would happen to the two firms' economic profits?

• A) Firm 1's profits remain the same, but firm 2's profits increase by 10.5
• B) Firm 1's profits decrease by 5.5, but firm 2's profits increase by 11.
• C) Firm 1's profits decrease by 25, but firm 2's profits increase by 12.5.
• D) Firm 1's profits decrease by 12.5, but firm 2's profits increase by 25.

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Definitions:

Differential Costs

The difference in cost between two alternative decisions, or changes in cost that result from choosing one option over another.

Equipment Replacement

The process of buying new equipment to replace old or outdated machinery to maintain or improve operational efficiency.

Useful Life

The estimated duration of time that an asset is expected to be economically usable by an entity, affecting its depreciation calculation.

Product Cost Concept

A concept used in applying the cost-plus approach to product pricing in which only the costs of manufacturing the product, termed the product cost, are included in the cost amount to which the markup is added.