Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 and Acme matches the price cut, then if consumers are evenly split between the two firms, Acme's economic profit will be ________.
A)$75
B)$100
C)$150
D)$200

Question

Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product.  Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 and Acme matches the price cut, then if consumers are evenly split between the two firms, Acme's economic profit will be ________.
A)$75 
B)$100 
C)$150 
D)$200

Quizplus · Accepted Answer

At $1 the quantity demanded is 150 and each will sell 75 units. Since average cost is zero, each firm's economic profit will be $75.

Suppose Acme and Mega Produce and Sell Identical Products and Face