The inverse market demand curve is P = 170 - 4Q. Two firms in this market are evenly splitting the output. Each firm produces the product at a constant marginal cost of $10. Which of the following statements is TRUE?
I. If one firm produces 2 more units of output, its profits will rise to $864.
II. If neither firm cheats, each firm will earn a profit of $800.
III. If one firm produces 3 more units of output, the other firm's profits will fall to $680.

Question

Quizplus · Accepted Answer

Given the inverse market demand curve P = 170 - 4Q and the fact that each firm produces at a constant marginal cost of $10, we can calculate the profits under different scenarios. For I, if one firm increases its output by 2 units, the total quantity (Q) in the market increases, affecting the price and profits. Given the setup, the calculation would show an increase in profits for the firm that increases its output, assuming optimal pricing and cost management.For II, with each firm not cheating and splitting output evenly, we can calculate their profits based on the given demand curve and marginal cost. The profit calculation would indeed show that each firm could earn a profit of $800 under these conditions, assuming they are producing at the quantity where marginal revenue equals marginal cost.For III, if one firm increases its output by 3 more units, it would affect the total market quantity and thus the market price. This would impact the profits of the other firm, potentially reducing it to $680, depending on how the increased output affects the market price and the remaining firm's output level.Each statement reflects a possible outcome based on economic theory and the given market conditions, including the inverse demand curve and constant marginal cost.

The Inverse Market Demand Curve Is P = 170 -