Scenario: There are two firms in an industry, Firm A and Firm B, and they consider entering into a colluding agreement. If the two firms collude, then they agree that they would both produce less than what they would if they were competing against each other in an oligopolistic market. Since Firm A expects Firm B to produce a small quantity of output in the colloding agreement, Firm A is facing a demand curve with the same slope but with a higher intercept. The following figure depicts demands that face Firm A in both the colluding agreement and the oligopolistic market.

-Refer to the scenario above.If the two firms agree that they both should produce 1 unit,what is the profit each firms gets?

Question

Scenario: There are two firms in an industry, Firm A and Firm B, and they consider entering into a colluding agreement. If the two firms collude, then they agree that they would both produce less than what they would if they were competing against each other in an oligopolistic market. Since Firm A expects Firm B to produce a small quantity of output in the colloding agreement, Firm A is facing a demand curve with the same slope but with a higher intercept. The following figure depicts demands that face Firm A in both the colluding agreement and the oligopolistic market.
 
-Refer to the scenario above.If the two firms agree that they both should produce 1 unit,what is the profit each firms gets?

Quizplus · Accepted Answer

If both firms produce 1 unit, the price will be $10.50 (intersection of the two firms' marginal revenue curves).

For Firm A: 
Total revenue = 1 unit x $10.50 = $10.50 
Total cost = $4 (production cost of 1 unit) 
Profit = Total revenue - Total cost = $6.50

For Firm B: 
Total revenue = 1 unit x $10.50 = $10.50 
Total cost = $3 (production cost of 1 unit) 
Profit = Total revenue - Total cost = $7.50

Therefore, each firm will earn a profit of $6.50 and $7.50 respectively, leading to a total profit of $14 for both firms combined.

Scenario: There Are Two Firms in an Industry, Firm a and Firm