Consider a market with the market demand D: P = 80 - Q, which is served by four Cournot oligopolistic producers (firms) with the constant marginal cost MC = $30 and no fixed cost

Marketing Jan 11, 2021

Consider a market with the market demand D: P = 80 - Q, which is served by four Cournot oligopolistic producers (firms) with the constant marginal cost MC = $30 and no fixed cost.

When these four firms collude to form a cartel (they behave like a monopoly), the market output is:

A. 10.

B. 20.

C. 25.

D. 35.

Expert Solution

The answer is C).

If the firms form a monopolist, then they will produce until marginal revenue is equal to marginal cost to maximize profit. Using the twice as steep rule, the marginal revenue is:

MR = 80 - 2Q

The constant marginal cost is 30, so the profit-maximizing quantity is given by:

MR = MC
80 - 2Q = 30
Q = 25

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