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.What is the profit of Firm A without collusion?

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.What is the profit of Firm A without collusion?

Quizplus · Accepted Answer

Firm A's profit without collusion is $4. This is because Firm A's marginal cost is $2, and it produces 2 units of output. Therefore, Firm A's total cost is $4, and its revenue is $6. Thus, Firm A's profit is $6 - $4 = $2.

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