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. Grandis, however, decides to cheat on the collusive agreement. If Grandis charges $1 less than the monopoly price while Immanis continues to charge the monopoly price, then Grandis will earn a profit of ________ per day.
A)$160
B)$80
C)$40
D)$20

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. Grandis, however, decides to cheat on the collusive agreement. If Grandis charges $1 less than the monopoly price while Immanis continues to charge the monopoly price, then Grandis will earn a profit of ________ per day.
A)$160 
B)$80 
C)$40 
D)$20

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. If Grandis decides to charge $4 per unit ($1 less than the monopoly price)and Immanis continues to charge $5 per unit, then Grandis will get all of the customers. When the price is $4 per unit, the quantity demanded is 40 units per day, and Grandis will earn a profit of ($4 × 40)- ($2 × 40)= $80.

Suppose Grandis and Immanis Are the Only Two Companies That