(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters.The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them.If they agree to produce only 50 water heaters, with each firm producing only 25 and if Rheem cheats on the agreement and produces 30 water heaters, what is the price effect?
A)-$1,000
B)-$2,500
C)$2,000
D)$1,000

Question

Quizplus · Accepted Answer

If Rheem cheats and produces 30 water heaters, the total production becomes 55. The price effect is the change in price due to the increase in quantity supplied. If the price drops by $50 per additional unit, the price effect for 5 additional units is 5 x $50 = $250, leading to a total price effect of -$2,500.

(Table: Demand for Solar Water Heaters) Look at the Table