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:

Horizontal Differentiation

The division of tasks, functions, or roles within an organization at the same hierarchical level to create specialization.

Organizational Hierarchy

The arrangement of individuals within an organization according to power, status, and job function, creating a structured chain of command.

Job Specialization

The process of focusing one's occupational concentration on a specific area of expertise, improving efficiency and proficiency.

Departmentalization

The method of dividing an organization into distinct departments or units, each specializing in a particular function or area of operation.