Assume the following demand and supply equation for a pesticide market:
Qd = 30,000 – 5000P
Qs = 10,000P
A. Calculate the perfectly competitive industry equilibrium price and output.
B. Assume that the firms in this industry organized into a cartel. Calculate the industry output and price.
C. Compare your answers for items a and b. Briefly describe the effect that organizing into a cartel had on price and output.
Answer:
a) A perfectly competitive market has equilibrium where Qs = Qd
10000P = 30000 – 5000P
15000P = 30000
P = $2 and Q = 20000 units.
Hence the equilibrium price is $2 and equilibrium quantity is 20000 units.
b) Find the inverse demand as 5000P = 30000 – Q or P = 6 – 0.0002Q. This gives total revenue function TR = PQ = 6Q – 0.0002Q^2. Then the marginal revenue function MR = 6 – 0.0004Q and MC = Q/100000 or MC = 0.0001Q. Now a cartel produces where MR = MC. This gives 6 – 0.0004Q = 0.0001Q or Q = 12000 units and price P = $3.6. Industry output is 12000 units and price is $3.6.
c) Note that if the two markets are compared, cartel produces less and charges more. This is due to the market power a cartel has over the market.
You might also like to view...
Since income and substitution effects point in the same direction for normal goods, the leisure demand curve will be shallower if leisure is a normal good than if leisure is an inferior good.
Answer the following statement true (T) or false (F)
The short-run Phillips curve will not shift unless there is
A) an increase in inflation that is unanticipated. B) a decrease in inflation that is unanticipated. C) a change in inflation expectations. D) an increase in the unemployment rate.
The new endogenous growth theory concludes that sustained economic growth in a country comes from the interaction of labor, investments in physical and human capital, and what is perhaps the key ingredient:
A) natural resources. B) the production of ideas. C) post-secondary education within that country. D) immigration into that country.
Assume the Treasury borrows $5 billion from the non-bank public and spends it
The effect on bank reserves is that they will __________ by $5 billion when the Treasury borrows and then bank reserves will __________ by $5 billion when the Treasury spends the money. A) rise; fall B) fall; rise C) rise; rise D) fall; fall