Chapter 12R, Problem 8MCQ

To determine

The correct option for reason where firm B can generate maximum of revenue if production is increased above the production agreement level.

Answer to Problem 8MCQ

Option c is correct.

Explanation of Solution

Explanation for correct option:

c.

Given Information:

Price (per pound)	Quantity in million of pound	Revenue generated
$6	0	$0
$5	10	$50
$4	20	$80
$3	30	$90
$2	40	$80
$1	50	$50
$0	60	$0

The revenue generated will be maximum if quantity of 50 million is produced at price $1 per pound by the firm B after violating the production agreement with firm A. The revenue will be $50. Therefore, option c is the only correct option.

Explanation for incorrect options:

a.

Neither firm A nor Firm B can earn $100 revenue as the prices are less for the quantity demanded. Therefore, option a is incorrect option.

b.

At output level of 30 million, the revenue generated can be maximum i.e. $90 million ($3 x 30 million). But if firm B increases the level of output from this then it can generate $50 million. Therefore, option b is incorrect option.

d.

Firm B will make $45 million when it maintains the production agreement. Therefore, option b is incorrect option.

e.

Firm B will make maximum of $50 million profit if it sells at $1. Therefore, option e is incorrect option.

Economics Concept Introduction

Oligopoly market structure: Market structure where there are few firms selling differentiated products. There are certain barriers to entry and exit which do not allow firms to enter the market easily.