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A large share of the world supply of bauxite (used for aluminum) comes from Australia and China

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A large share of the world supply of bauxite (used for aluminum) comes from Australia and China.

Suppose that the marginal cost of mining bauxite is constant at $1,000 per tonne of bauxite, the demand for bauxite is described by P = 15,000 - Q and the MR is P = 15,000 - 2Q

a. If there were many suppliers of bauxite, what would be the price and quantity?

b. If there were only one supplier of bauxite, what would be the price and quantity?

c. If Australia and China formed a cartel, what would be the price and quantity?

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a. Finding the competitive price and quantity

On a market with many suppliers and free entry and exit, the price will be always equal to the marginal cost, i.e., P = $1,000. Then, we can find the quantity from the demand function as 1,000 = 15,000 - Q, and hence, Q = 14,000

b. Finding the monopoly price and quantity

The monopoly maximizes its profit at such a quantity that the marginal cost equals the marginal revenue, i.e., 1,000 = 15,000 - 2Q, and hence, Q = 7,000

The monopoly will charge the price that the market is ready to pay at the optimal quantity, i.e., P = 15,000 - Q = 15,000 - 7,000 = $8,000

c. Finding the cartel price and quantity

If several firms (or countries) form a cartel, they will coordinate to maximize their joint profits. This is achieved at the monopoly price and quantity. Hence, P = $8,000 and Q = 7,000