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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