Suppose Grandis and Immanis are the only two companies that sell the product whose market demand curve is shown in the accompanying figure. For both companies, both average total cost and marginal cost are constant and equal to $2 (ATC = MC = $2). Suppose Grandis and Immanis agree to collude by both charging the price a monopolist would charge and each producing half of the monopolist's profit-maximizing level of output. If they both abide by this agreement, then each will earn a profit of ________ per day.
A)$150
B)$75
C)$90
D)$45

Question

Suppose Grandis and Immanis are the only two companies that sell the product whose market demand curve is shown in the accompanying figure. For both companies, both average total cost and marginal cost are constant and equal to $2 (ATC = MC = $2).  Suppose Grandis and Immanis agree to collude by both charging the price a monopolist would charge and each producing half of the monopolist's profit-maximizing level of output. If they both abide by this agreement, then each will earn a profit of ________ per day.
A)$150 
B)$75 
C)$90 
D)$45

Quizplus · Accepted Answer

In this example, the monopolist's marginal revenue curve is given by MR = 8 - 0.20Q. To maximize its profits, the monopolist would set MR = MC, or 8 - 0.20Q = 2, or Q = 30 units per day. At this quantity, the monopolist would charge $5 per unit. Thus, if Grandis and Immanis abide by their collusive agreement, both will charge $5 per unit, each will produce 15 units per day, and each will earn a profit of ($5 × 15)- ($2 × 15)= $45 per day.

Suppose Grandis and Immanis Are the Only Two Companies That