question archive Only two firms, ABC and XYZ, sell a particular product
Only two firms, ABC and XYZ, sell a particular product
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Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost.
| Price | Quantity | Total Revenue |
|---|---|---|
| 28 | 0 | 0 |
| 26 | 5 | 130 |
| 24 | 10 | 240 |
| 22 | 15 | 330 |
| 20 | 20 | 400 |
| 18 | 25 | 450 |
| 16 | 30 | 480 |
| 14 | 35 | 490 |
| 12 | 40 | 480 |
| 10 | 45 | 450 |
| 8 | 50 | 400 |
| 6 | 55 | 330 |
| 4 | 60 | 240 |
| 2 | 65 | 130 |
| 0 | 70 | 0 |
ABC and XYZ agree to jointly maximize profits. If ABC and XYZ each break the agreement and each produce 5 more than agreed upon, how much less profit does each make?
a. $60
b. $20
c. $5
d. $90
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Choice B is correct. If ABC and XYZ agree to jointly maximize profit, they will produce output that maximizes industry profit. Profit is the difference between total revenue and total cost. Since there are no fixed costs, total costs (TC) are calculated as:
TC=MC×QTC=MC×Q
where MC is marginal cost and Q represents the output.
| Price | Quantity | Total Revenue | Total Cost | Profit=TR-TC |
|---|---|---|---|---|
| 28 | 0 | 0 | 0 | 0 |
| 26 | 5 | 130 | 40 | 90 |
| 24 | 10 | 240 | 80 | 160 |
| 22 | 15 | 330 | 120 | 210 |
| 20 | 20 | 400 | 160 | 240 |
| 18 | 25 | 450 | 200 | 250 |
| 16 | 30 | 480 | 240 | 240 |
| 14 | 35 | 490 | 280 | 210 |
| 12 | 40 | 480 | 320 | 160 |
| 10 | 45 | 450 | 360 | 90 |
| 8 | 50 | 400 | 400 | 0 |
| 6 | 55 | 330 | 440 | -110 |
| 4 | 60 | 240 | 480 | -240 |
| 2 | 65 | 130 | 520 | -390 |
| 0 | 70 | 0 | 560 | -560 |
ABC and XYZ agree to produce 25 units and share the maximum profit of $250. If ABC and XYZ each break the agreement and each produce 5 more than agreed upon, the total industry output will be 35 (=25+5+5). At 35 units, industry profit is $210. total profits are reduced by $40. Each firm will make $20 less profit.
