Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q_i². If one firm honors the cartel agreement while the other firm defects, the market price is: A)16. B)8. C)12. D)10.

Question

Quizplus · Accepted Answer

If one firm defects, it will produce more than the agreed quantity, leading to a lower market price. The defecting firm will produce where its marginal cost equals marginal revenue. Solving for equilibrium quantity and substituting into the demand equation gives P = 8.

Market Demand Is Given by P = 15 - Q