Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Quick Buck and Pushy Sales 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 Quick Buck cheats by reducing its price to $1 while Pushy Sales continues to comply with the collusive agreement, then Quick Buck's economic profit will be ______.
A)$6,000
B)$4,000
C)$2,000
D)$3,000

Question

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product.  Suppose Quick Buck and Pushy Sales 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 Quick Buck cheats by reducing its price to $1 while Pushy Sales continues to comply with the collusive agreement, then Quick Buck's economic profit will be ______.
A)$6,000 
B)$4,000 
C)$2,000 
D)$3,000

Quizplus · Accepted Answer

Under the collusive agreement, each firm will produce half of the quantity demanded at the monopoly price. The monopoly price is where the market demand intersects with the combined quantity produced by both firms. From the graph, the monopoly price is $5 and the quantity demanded at that price is 10 units. Therefore, each firm will produce 5 units.

If Quick Buck cheats by lowering its price to $1, it will capture the entire market demand of 20 units, leaving Pushy Sales with no sales. Quick Buck's cost of producing 5 units is zero, so its total revenue from selling 20 units at $1 each is $20. Therefore, Quick Buck's economic profit from cheating is:

Profit = Total Revenue - Total Cost
Total Cost = Cost per unit x Quantity
Total Cost = $0 x 5 units
Total Cost = $0

Profit = $20 - $0 = $20
Profit per unit = Price - Cost per unit
Profit per unit = $1 - $0 = $1
Total profit = Profit per unit x Quantity
Total profit = $1 x 20 units
Total profit = $20 x 1 = $20

Quick Buck's economic profit from cheating is $20, which is $3,000 higher than its profit under the collusive agreement. Therefore, the answer is (D) $3,000.

Quick Buck and Pushy Sales Produce and Sell Identical Products