Figure: Demand 2 Two firms in an industry act as a cartel, with each firm agreeing to charge a price of $16 and sell two units of output. If one of them cheats and produces two more units of output, the cheating firm's total revenue increases by ______ and the other firm's total revenue decreases by ______.
A) $24; $4
B) $28; $14
C) $84; $32
D) $12; $8

Question

Figure: Demand 2  Two firms in an industry act as a cartel, with each firm agreeing to charge a price of $16 and sell two units of output. If one of them cheats and produces two more units of output, the cheating firm's total revenue increases by ______ and the other firm's total revenue decreases by ______.
A) $24; $4 
B) $28; $14 
C) $84; $32 
D) $12; $8

Quizplus · Accepted Answer

If the cheating firm produces two more units, their total output will be four, and the market price will remain at $16. Therefore, the cheating firm's total revenue will increase by 2 x $16 = $32. On the other hand, the other firm's output will remain at two units, but the market price will decrease to $14 due to the increase in supply. Therefore, the other firm's total revenue will decrease by (2 x $14) - (2 x $16) = $28 - $32 = -$4. To find the change in revenue, we take the difference between the total revenue before and after the cheating: ($32 + $0) - (2 x $16) = $32 - $32 = $0 for the cheating firm, and (2 x $14) - (2 x $16) = $28 - $32 = -$4 for the other firm.

Figure: Demand 2 Two Firms in an Industry Act