Figure: Monopoly Profits in Duopoly (Figure: Monopoly Profits in Duopoly) If the two firms in the figure Monopoly Profits in Duopoly colluded to maximize their joint profits, the market price they set would be , and each
Firm's economic profit would be _.

Question

Figure: Monopoly Profits in Duopoly  (Figure: Monopoly Profits in Duopoly) If the two firms in the figure Monopoly Profits in Duopoly colluded to maximize their joint profits, the market price they set would be , and each
Firm's economic profit would be _.

Quizplus · Accepted Answer

If the two firms collude to maximize their joint profits, they will act as if they were a monopolist and choose the profit-maximizing price and quantity combination, which occurs where MR = MC. In the given figure, that occurs at point E, where the marginal cost curve intersects the marginal revenue curve. At this point, the market price is P₂ and the quantity sold is Q₂.

To determine each firm's profit, we need to find their output levels and corresponding costs at this price. From point E, we draw a horizontal line to the quantity axis to find Q∗. Each firm will produce half of the total quantity, so Q₁ = Q₂ = Q∗/2. To find their costs, we draw vertical lines from Q₁ and Q₂ to their respective average total cost (ATC) curves. The points where these vertical lines intersect the ATC curves give us their average costs at the given output levels.

Once we have their costs, we can calculate each firm's profit by subtracting their total cost from their revenue, which is the market price multiplied by their output. The profit for each firm is given by the areas of the rectangles bounded by the price line and the respective average cost curves. In this case, firm 1's economic profit is given by FEBG, and firm 2's economic profit is given by P₁P₂EF. Therefore, the answer is A: P₂; given by the area of the rectangle bounded by P₁P₂EF = FEBG.