Use the following to answer questions:
-(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 collude, what price will the cartel charge and how many water heaters will the cartel sell?
A) $1,000; 50
B) $1,100; 45
C) $900; 55
D) $800; 60

Question

Use the following to answer questions: 
-(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 collude, what price will the cartel charge and how many water heaters will the cartel sell?
A) $1,000; 50 
B) $1,100; 45 
C) $900; 55 
D) $800; 60

Quizplus · Accepted Answer

The cartel will charge the price that maximizes total revenue. Total revenue is equal to price times quantity, so the cartel will choose the price that maximizes this product. The marginal revenue curve is the derivative of the total revenue curve, and it tells us how much total revenue will increase for each additional unit sold. The marginal cost curve is the derivative of the total cost curve, and it tells us how much total cost will increase for each additional unit produced. In this case, the marginal cost is zero, so the cartel will produce the quantity where marginal revenue is zero. The marginal revenue curve is downward sloping, so the cartel will produce the quantity where the marginal revenue curve intersects the x-axis. This quantity is 50, and the price that the cartel will charge is $1,000.

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