A two-firm cartel produces at a constant marginal cost of $20 faces a market inverse demand curve of P = 100 - 0.50Q. Initially, both firms agree to act like a monopolist, each producing 40 units of output. If one of the firms cheats on the agreement (assuming the other firm is compliant and continues to produce at 40 units), how much output should the cheating firm produce to maximize profits?

a. 20 units

b. 60 units

c. 80 units

d. 44 units

A cartel is a form of an oligopoly. Oligopolies are similar to monopolies because the restrict output and increase prices to maximize profits. An oligopoly is a market situation where a few firms control a large market share and a monopoly is one firm.

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{Section title='answer !!!Answer and Explanation: If both firms are producing 40 units, they are maximizing profit with respect to the market demand. The total revenue is equal to the price multiplied by the quantity. The marginal revenue is equal to the derivative of the total revenue. Set the marginal revenue equal to the marginal cost and solve for quantity to find the profit maximizing output. Solve for price with the equilibrium quantity of a monopolist added to the quantity of the firm that didn't cheat. . *P = 100 - 0.5Q *Total Revenue = P * Q = 100Q - 0.5Q%%(vertical-align: super)2%% *Marginal Revenue = 100 - Q Set MR=MC *20 = 100 - Q *Q = 80 For the firm that cheats: *P = 100 - 0.5(80 + 40) = 100 - 60 = 40 *TR = 40 * 80 = 3200 The firm that cheats makes more money if it charges a price of 40 at a quantity of 80 than any other price. The answer is c) 80 units.