Chapter 64, Problem 1FRQ

a)

To determine

To calculate: the market equilibrium price and quantity in long run in the case of a perfectly competitive market.

Explanation of Solution

When the market is perfectly competitive, the price will be zero and the quantity will be 12 as represented in the table given in the question.

In a perfectly competitive market, the price equals the MC (marginal cost) in the long-run equilibrium, so the price will be zero and the quantity will be 12.

The equilibrium point is the point where MC=MR.

Economics Concept Introduction

Perfect competition: In perfect competition, the number of buyers and sellers is very large and the firms are usually price takers; therefore, no individual firm has the power to influence the market price.

b)

To determine

To calculate: the market price and quantity, when the market is a duopoly and the firms collude to maximize the joint profits.

Explanation of Solution

In case the market is a duopoly, the price will be $12 and the quantity will be 6.

In order to maximize joint profits, the 2 firms would act as a monopoly, they would set the marginal revenue (MR) equal to the marginal cost (MC) and find the price on the demand curve above the profit-maximizing quantity.

Going from 2 to -2 MR passes through zero after the 6^th unit, making the 6^th profit-maximizing quantity.

Most consumers would pay for 6 units is $ 12, so that is the profit-maximizing price.

Economics Concept Introduction

Introduction:

Duopoly: is defined as a type of oligopoly in which two firms have exclusive or dominant control over a market. It is one of the most frequently studied forms of an oligopoly because of its simplicity.

Duopolies usually sell their products to customers in a competitive market in which the preferences and choices of an individual consumer will not affect the firm.

c)

To determine

To calculate: the firm’s total revenue when the firms split the market equally when the market is a duopoly and the firms collude to maximize the joint profits.

Explanation of Solution

Total revenue is calculated by multiplying price and quantity i. e P X Q

Total revenue is $12 X 6= $72.

Therefore, by dividing this equally each firm receives $36.

Economics Concept Introduction

Introduction:

Duopoly: is defined as a type of oligopoly in which two firms have exclusive or dominant control over a market. It is one of the most frequently studied forms of an oligopoly because of its simplicity.

Duopolies usually sell their products to customers in a competitive market in which the preferences and choices of an individual consumer will not affect the firm.