Duopoly Market for mechanical pencils can be described by the following demand schedule: Price | Number of pencils demanded $6 | 80 $5 | 200 $4 | 320 $3 | 440 $2 | 560 $1 | 680 $0 | 800 The fixed cost is $340, while the variable cost is $0.50. a) For each price, find the total revenue, the total cost, and the profit. b) If the market was under perfect competition, what would be the price and the quantity of pencils traded in the long run? Why? c) If there was only one seller on the market, what would be the price and the quantity of pencils traded? Why? d) If there were two firms on the market and they agreed to cooperate, how much would each firm need to produce? Follow the procedure outlined in the lecture and show that the other firm would prefer to deviate from the agreement. e) When the firms deviate from the agreement, there is a new optimal level of output. Show whether the firms have an incentive to deviate from that level? f) If there were two firms on the market, what would be the price and the quantity of pencils traded if the firms couldn’t cooperate?
Duopoly
Market for mechanical pencils can be described by the following demand schedule:
Price | Number of pencils demanded
$6 | 80
$5 | 200
$4 | 320
$3 | 440
$2 | 560
$1 | 680
$0 | 800
The fixed cost is $340, while the variable cost is $0.50.
a) For each price, find the total revenue, the total cost, and the profit.
b) If the market was under
pencils traded in the long run? Why?
c) If there was only one seller on the market, what would be the price and the quantity of
pencils traded? Why?
d) If there were two firms on the market and they agreed to cooperate, how much would each
firm need to produce? Follow the procedure outlined in the lecture and show that the other
firm would prefer to deviate from the agreement.
e) When the firms deviate from the agreement, there is a new optimal level of output. Show
whether the firms have an incentive to deviate from that level?
f) If there were two firms on the market, what would be the price and the quantity of pencils
traded if the firms couldn’t cooperate?
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