question archive Suppose that there are only two firms in the petroleum market Saudi Aramco (SA) and Kuwait Petroleum Corporation (KPC)
Suppose that there are only two firms in the petroleum market Saudi Aramco (SA) and Kuwait Petroleum Corporation (KPC)
Subject:MarketingPrice:2.88 Bought3
Suppose that there are only two firms in the petroleum market Saudi Aramco (SA) and Kuwait Petroleum Corporation (KPC).
Demand equation: [Math Processing Error]P=110−Q
For each firm marginal cost [Math Processing Error]MC=$20
(Quantity of outcome [Math Processing Error](qSA), Price [Math Processing Error](pSA), Profit [Math Processing Error](πSA)), (Quantity of outcome [Math Processing Error](QKPC), Price [Math Processing Error](pKPC), Profit [Math Processing Error](πKPC))
[Math Processing Error]Q=qSA+qKPC
Suppose that the firms cooperate to act as a monopoly and want to form an OPEC cartel in the market, then:
a. What are the objectives of this cartel?
b. Calculate: Quantity of output, price, profit.
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a).
Given that;
[Math Processing Error]P=110−QMC=$20Q=QSA+QKPC
The objective of the cartel is to maximize profit by restricting the volume of output.
b).
If the two firms collude and successfully form a cartel, they will maximize profit just like the monopoly. They will produce at a point where the marginal revenue is equal to the marginal cost:
[Math Processing Error]P=110−QMR=110−2QMR=MC20=110−2QQ=45∴QSA=QKPC=22.5∴P=110−45=$65
Profit is the difference between the total revenue and the total cost:
[Math Processing Error]∏=TR−TC=(65×22.5)−20(22.5)=$1012.50
Each firm will produce 22.5 units, sell at $65 each, and make a profit of 1012.50.
