Table 17-6. The table shows the demand schedule for a particular product.

-Refer to Table 17-6.Suppose the market for this product is served by two firms that have formed a cartel.If the marginal cost of production is $0 and there is no fixed cost,the combined profit of the cartel will be
A) $16
B) $24
C) $30
D) $32

Question

Table 17-6. The table shows the demand schedule for a particular product.
 
-Refer to Table 17-6.Suppose the market for this product is served by two firms that have formed a cartel.If the marginal cost of production is $0 and there is no fixed cost,the combined profit of the cartel will be
A) $16 
B) $24 
C) $30 
D) $32

Quizplus · Accepted Answer

The cartel will aim to maximize its profit by jointly determining the output level that maximizes the total revenue minus the total cost. Since the marginal cost of production is $0, the cartel will choose the output level where the marginal revenue equals zero, which is at a total output of 8 units (4 units each for the two firms). To find the price that the cartel will charge, we can determine the total revenue at this output level, which is $32 (= $4 x 8 units). Since the two firms will split this revenue equally, each firm will earn a profit of $16, yielding a total combined profit of $32. Therefore, the answer is D ($32).