Table 16-6

-Refer to Table 16-6.This table shows the demand schedule for a particular product.Suppose the market for this product is served by two duopolists who have formed a cartel and are colluding to set the price and quantity in this market.If the marginal cost to produce this product is $2,what price will the cartel set in this market?
A)$4
B)$5
C)$6
D)$7

Question

Table 16-6
 
-Refer to Table 16-6.This table shows the demand schedule for a particular product.Suppose the market for this product is served by two duopolists who have formed a cartel and are colluding to set the price and quantity in this market.If the marginal cost to produce this product is $2,what price will the cartel set in this market?
A)$4 
B)$5 
C)$6 
D)$7

Quizplus · Accepted Answer

The cartel will set the price where marginal revenue (MR) equals marginal cost (MC), in order to maximize their profits. Using the demand schedule, we can calculate the total revenue at each quantity, and the corresponding marginal revenue.

At a price of $6, the total quantity demanded is 28 units. The cartel's total revenue at this price is $168 [(6)(28)]. The marginal revenue at this quantity is $4.

At any quantity below 28 units, the cartel can increase their profits by producing more and selling it at a higher price. However, if the cartel produces more than 28 units, the price will have to be decreased in order to sell the additional units, which will result in a decrease in total revenue.

At a quantity of 28 units and a price of $6, the cartel's total cost is $56 [(2)(28)]. Their total profit is $112 [(6-2)(28)], which is maximized at this price and quantity.

Therefore, the cartel will set the price at $6 in this market.

Table 16-6 -Refer to Table 16-6.This Table Shows the Demand Schedule for the Demand