Microeconomics
13th Edition
ISBN: 9781337617406
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 11, Problem 4WNG
To determine
Determine the firm’s profit if it follows the cartel agreement and if it breaks the cartel agreement.
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Consider a hypothetical demand schedule for monosodium glutamate (MSG). Suppose that Ajinomoto holds 50% of the market, Jiali holds 30% of the market, and Quingdao holds 20% of the market.
Suppose the three firms agree to form a cartel to fix production of monosodium glutamate. Assume marginal cost equals zero, and the output is split equally across the firms.
Price of MSG ($ per pound)
Quantity of MSG demanded (millions of pounds)
$8
0
$7
20
$6
30
$5
40
$4
60
$3
90
$2
110
$1
180
$0
300
What quantity maximizes the cartel's profit?
a.110 million pounds
b.90 million pounds
c.300 million pounds
d.20 million pounds
Suppose Ajinomoto's marginal cost remains equal to zero, but for Jiali and Quingdao, marginal costs rise above zero.
How would this affect the incentive of Ajinimoto to act noncooperatively and change its output?
a.Ajinomoto will have an incentive to increase its output of MSG.
b.Ajinomoto will not have an incentive to change its…
The following graph shows the marginal cost (MC) and average total cost (ATC) and the initial demand (D₁) curves of a perfectly competitive firm.
Suppose this firm forms a cartel with other firms in the industry. Because of the cartel agreement, it has been assigned a production quota of 35 units.
The cartel price is $80 per unit of output.
You may use the purple rectangle (diamond symbols) to help you answer the questions that follow. You will not be graded on any changes you make
to the graph.
(Dollars)
100
14
ATC
MC
PRICE
90
80
70
60
50
40
30
20
10
0
0
10 20
30
40 50 60 70
QUANTITY (Units)
D
80 90 100
If the firm adheres to the cartel agreement, its profits will be $
Area
If the firm breaks the cartel agreement and produces 85 units, its profits will be $
The table shows a hypothetical demand schedule for monosodium glutamate (MSG). Ajinomoto holds 5050% of the market, Jiali holds 3030% of the market, and Quingdao holds 2020% of the market.
Suppose the three firms agree to form a cartel to fix production of monosodium glutamate. Assume marginal cost equals zero, and the output is split equally across the firms. What quantity maximizes the cartel's profit?
Price of MSG ($ per pound)
Quantity of MSG demanded (millions of pounds)
$8$8
00
$7$7
2020
$6$6
3030
$5$5
4040
$4$4
6060
$3$3
9090
$2$2
110110
$1$1
180180
$0$0
300300
million pounds million pounds
Suppose Ajinomoto's marginal cost remains equal to zero, but for Jiali and Quingdao, marginal costs rise above zero. How would this affect the incentive of Ajinomoto to act noncooperatively and change its output?
Ajinomoto will not have an incentive to change its output.
Ajinomoto will have an incentive to increase its output of MSG.…
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- The table shows a hypothetical demand schedule for monosodium glutamate (MSG). Ajinomoto holds 50% of the market, Jiali holds 30% of the market, and Quingdao holds 20% of the market. Suppose the three firms agree to form a cartel to fix production of monosodium glutamate. Assume marginal cost equals zero, and the output is split equally across the firms. What quantity maximizes the cartel's profit? Price of MSG ($ per pound) Quantity of MSG demanded (millions of pounds) $8 0 $7 20 $6 30 $5 40 $4 60 $3 90 $2 110 $1 180 $0 300 __________million poundsarrow_forwardConsider a hypothetical demand schedule for monosodium Quantity of MSG demanded (millions of pounds) Price of MSG glutamate (MSG). Suppose that Ajinomoto holds 50% of ($ per pound) the market, Jiali holds 30% of the market, and Quingdao $8 holds 20% of the market. $7 20 Suppose the three firms agree to form a cartel to fix $6 30 production of monosodium glutamate. Assume marginal cost equals zero, and the output is split equally across $5 40 $4 60 the firms, $3 90 $2 110 What quantity maximizes the cartel's profit? $1 180 SO 300 110 million pounds 90 million pounds 300 million pounds 20 million pounds Suppose Ajinomoto's marginal cost remains equal to zero, but for Jiali and Quingdao, marginal costs rise above zero. How would this affect the incentive of Ajinimoto to act noncooperatively and change its output? Ajinomoto will have an incentive to increase its output of MSG. Ajinomoto will not have an incentive to change its output. Ajinomoto will have an incentive to decrease its output…arrow_forwardSuppose that a price-taker firm has a marginal cost function given by: MC= 20+0.2q. The firm could join a cartel in its industry and agree to a quota of 10 units. The collusion drives the price of the good from $24.55 to $50.00. Suppose that if the firm cheats on the cartel, it has no effect on the price. Calculate the producer surplus of this firm when they cheat on the cartel.arrow_forward
- OPEC is a petroleum cartel, a group of oil producing countries whose objective is to coordinate and unify petroleum policies. What type of market structure is a cartel?arrow_forwardWhy are cartel agreements often not successful? Different firms experience different costs. All parties would make more money if everyone increased production. One party has an incentive to cheat to make more profit?arrow_forwardWhich of the following methods could a cartel NOT use to prevent its member fırms from breaking their agreements? If a member fırm breaks its agreement, it is a breach of contract and the firm is subject to legal penalties. The cartel acts as a monopolist, maximizing the combined profits of all the member firms. All of the other choices could be used to prevent member firms from breaking agreements. The cartel requires member firms to structure executive pay in such a way that the executives benefit personally from preserving the cartel. If a member firm breaks its agreement, that firm is kicked out of the cartel permanently and can no longer earn cartel profits in the future.arrow_forward
- Suppose that two identical firms produce widgets and that they are the only firms in the market. The average and marginal cost is €6 for each firm. Price is determined by the following demand curve: P = 30 – Q where Q = Q1 + Q2. Suppose the two firms combine together and form a cartel. The output produced by each firm in the cartel is (assuming that they split the cartel output equally between them) A. 6 B. 12 C. 8 D. 4 Two identical firms compete in a market to sell a homogenous good with the following inverse demand function: P = 600 – 3Q. Each firm produces at a constant marginal cost of €300 and there are no fixed costs. The price that each firm in the Cournot equilibrium will charge is A. 400 B. 500 C. 300 D. 450arrow_forwardWhat is the primary reason that cartels fail to work? Becoming a cartel reduces barriers to entry for new firms. It is trivial for one firm to force the other cartel members out of the market and become a monopoly. Firms in a cartel can increase their profits by breaking the agreements made with the other cartel firms. Anti-trust law is quick to break up cartels. Operating as part of a cartel is more expensive and reduces profits.arrow_forwardGotcha, the only seller of stun guns, faces the inverse market demand curve, P = 400 - 120, where Q measures the number of stun guns sold per day, and P is the price per stun gun. The marginal cost is constant at $64. Suppose a new firm, Ouchy, enters the stun gun market. Ouchy's marginal cost is also constant at $64. Gotcha and Ouchy agree to form a cartel and evenly split the market output. Gotcha holds to the agreement, but Ouchy decides to produce 5 more stun guns than its level under the cartel agreement. In this case, the market price is $. 172 192 232 205arrow_forward
- Breakdown of a cartel agreement Consider a town in which only two residents, Darnell and Eleanor, own wells that produce water safe for drinking. Darnell and Eleanor can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water. (base to table 1) Suppose Darnell and Eleanor form a cartel and behave as a monopolist. The profit-maximizing price is $_____ per gallon, and the total output is _____ gallons. As part of their cartel agreement, Darnell and Eleanor agree to split production equally. Therefore, Darnell's profit is $_______, and Eleanor's profit is $______. Suppose that Darnell and Eleanor have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Darnell says to himself, "Eleanor and I aren't the best of friends anyway. If I increase my production to 45 gallons more than…arrow_forwardBreakdown of a cartel agreementarrow_forwardConsider an industry that consists of 4 firms, all competing over the same market, given by the following demand equation: P=80-3Q All firms have the same Total Cost Function, given by: TC₁=10q,+2q Suppose the firms decide to collude and voluntarily restrict output and raise price, in order to increase profits. a) What price will be charged by the members of the cartel? Assume the head of the cartel is fair and distributes output q, equally among the 4 firms (since they have identical costs). b)What is the output of each individual firm? c) What is each individual firm's profit? We know that there is a built-in incentive for cartel members to cheat on the cartel. If, as a result, the cartel breaks down: d) What price will be charged in the market? e) Assuming each firm captures an equal share of the market, what now is each firm's output, q? f) What now is individual firm profit? g) Illustrate your answerarrow_forward
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