Use the following to answer question:
-(Table: Demand Schedule of Gadgets)Use Table: Demand Schedule of Gadgets.The market for gadgets consists of two producers,Margaret and Ray.Each firm can produce gadgets at a marginal cost of $2 and no fixed cost.Suppose that these two producers have formed a cartel,agreed to split production of output evenly,and are maximizing total industry profits.If Margaret decides to cheat on the agreement and sell 100 more gadgets,Margaret's price effect will be a(n)_____ in profit of _____.
A)decrease;$400
B)increase;$400
C)increase;$200
D)decrease;$200

Question

Use the following to answer question: 
-(Table: Demand Schedule of Gadgets)Use Table: Demand Schedule of Gadgets.The market for gadgets consists of two producers,Margaret and Ray.Each firm can produce gadgets at a marginal cost of $2 and no fixed cost.Suppose that these two producers have formed a cartel,agreed to split production of output evenly,and are maximizing total industry profits.If Margaret decides to cheat on the agreement and sell 100 more gadgets,Margaret's price effect will be a(n)_____ in profit of _____.
A)decrease;$400 
B)increase;$400 
C)increase;$200 
D)decrease;$200

Quizplus · Accepted Answer

If Margaret cheats and produces 100 more gadgets, total industry output will increase by 100 gadgets. This means that the market quantity will increase from 200 to 300. At a price of $14, demand for gadgets is 300. Therefore, the price will stay the same at $14. However, Margaret's share of the market will increase from 100 to 200, while Ray's share will decrease from 100 to 50. Margaret's total revenue will increase from $1,400 to $2,800. However, her total cost will also increase from $200 to $400 (due to the marginal cost of $2 per gadget). Therefore, her profit will increase by $2,200 - $400 =$1,800. But the total industry profit will decrease from $3,000 to $2,800, resulting in a loss of $200. Therefore, Margaret's price effect will be a decrease in profit of $200.

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