Gotcha, the Only Seller of Stun Guns, Faces the Inverse

question 107

Multiple Choice

Gotcha, the only seller of stun guns, faces the inverse market demand curve P = 400 - 12Q, where Q measures the number of stun guns per day and P is the price per stun gun. The marginal cost is constant at $64. Suppose a new firm, Ouchy, enters the stun gun market. Ouchy's marginal cost is also constant at $64. Gotcha and Ouchy agree to form a cartel and evenly split the market output. Gotcha holds to the agreement, but Ouchy decides to produce 5 more stun guns than its level under the cartel agreement. In this case, the market output is ____.

• A) 7
• B) 12
• C) 14
• D) 19

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Definitions:

Marginal Cost

The extra expense associated with the production of an additional unit of a product or service.

Kinked Demand Curve Model

A model in economics illustrating how firms in oligopoly markets might maintain stable prices despite changes in cost or demand, due to the asymmetric responses of rivals to price changes.

Price Reduction

A decrease in the selling price of goods or services, often to attract more buyers or respond to market conditions.

Non-OPEC Oil

Crude oil produced by countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC).