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 profits to the defecting firm are: A)20.. B)26. C)22. D)24.

Question

Quizplus · Accepted Answer

If one firm defects, it acts as a monopolist on the residual demand. The defecting firm maximizes profit by setting marginal cost equal to marginal revenue. Solving for the defecting firm's output and profit yields a profit of 24.

Market Demand Is Given by P = 15 - Q