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:

Pay-per-view

A type of television or online streaming service where the viewer pays to watch a particular event or program, typically used for special events or premium content.

Marginal Cost

The outgoings involved in creating one more unit of a product or service.

Price Discrimination

Involves selling the same product to different customers at different prices based on what each is willing to pay, rather than differences in production cost.

Price Discrimination

The practice of charging different prices for the same product or service to different consumers, based on what each is willing to pay.