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Scenario: Two Identical Firms
Two identical firms make up an industry in which the market demand curve is represented by Q = 5 000 - 4P,where Q is the quantity demanded and P is the price per unit.The marginal cost of producing the good in this industry is constant and equal to $650.Fixed cost is zero.
-(Scenario: Two Identical Firms)Use Scenario: Two Identical Firms.Suppose the two firms decide to cooperate and collude,resulting in the same amount of production for each firm.What is the profit-maximizing price and output for the industry?

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Quizplus · Accepted Answer

To maximize profit, the firms will set marginal revenue equal to marginal cost. The inverse demand function is P = 1250 - 0.25Q. The marginal revenue function is MR = 1250 - 0.5Q. Setting MR = MC (650), we solve for Q: 650 = 1250 - 0.5Q, giving Q = 1,200. Substituting Q into the demand function gives P = 950.

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