Figure: Demand 3 If the two-firm oligopoly facing the market in this diagram is currently producing at the competitive output level and one of the firms reduces output by 4 units, the firm's profits would increase from _________________.
A) $64 to $96
B) $0 to $24
C) $0 to $48
D) $32 to $48

Question

Figure: Demand 3  If the two-firm oligopoly facing the market in this diagram is currently producing at the competitive output level and one of the firms reduces output by 4 units, the firm's profits would increase from _________________.
A) $64 to $96 
B) $0 to $24 
C) $0 to $48 
D) $32 to $48

Quizplus · Accepted Answer

At the competitive output level, each firm produces 8 units and earns a profit of $64 (area of the rectangle from Q=0 to Q=8, and P=24 to P=16).

If one of the firms reduces output by 4 units, the total output in the market decreases from 16 units to 12 units. According to the new market demand, the equilibrium price will increase from $16 to $24.

The firm that reduces output will now produce 4 units and earn a profit of $48 (area of the rectangle from Q=0 to Q=4, and P=24 to P=20).

The other firm will continue to produce 8 units and earn a profit of $96 (area of the rectangle from Q=4 to Q=12, and P=20 to P=16).

Therefore, the firm's profits would increase from $0 to $48.

Figure: Demand 3 If the Two-Firm Oligopoly Facing the Market