T- Light Cartel
Company B and Company F are two firms producing a
homogeneous product involving the sale of street lights. Due to govt oversight their
product requires approval by an energy oversight group before products can be
sold. Both companies have a MC =$8 (MC
=$8) and no fixed costs (FC =0). The demand for their product is given by the
function P=32-Q where P is in dollars and Q is the product quantity. The demand
function is a blue curve line running from point 0, 32 and point 32, 0 (circle
symbols, marked D) on a graph. Because there are only two producers of the
lights, the total quantity in the market is given as Q = Q1 + Q2 where Q1 is
the number of times produced by company B and Q2 is the number produced by
company F.
In an attempt to maximize profits Firm B and F decide to
form a cartel called T-Light
a.
Using an orange line graph the T-Lights marginal
cost (MC). Using a purple line (diamond symbols) graph T-Lightâs marginal
revenue (MR). The graph runs from 0-32
quantity x axis and 0-32 price y axis.
b.
T-Light will choose to produce a total (market)
quantity of ____X___________ (options for X are – 6, 18, 8, 12, 16, 24) .
c.
The market price will be ______Y______ (options
for Y are $20, $16, $8, $26, $14, $24).
d.
Company B and Company F will each produce
____Z______(options for Z are 4, 12 6, 8, 3, 9) and make a profit of
__________W_______ (options for W are $72, $0, $144, $64, $36, $108
Note: That Company B and F will produce the
dame quantity only when their costs are identical. If each firm had different
costs, the cartel might find it profit maximizing to split production and/or
profits unevenly between the two firms.
e.
Graph the equilibrium market price that T-Light
cartel will choose.
f.
Assuming that both companies have the cost and
demand information above, which of the following is not a reason for the T-Light
cartel to fail?
1.
high profits made by the cartel members will
attract other firms to the market
2.
Collusions are illegal and cartels are often
fined large sums
3.
A cartel will not increase profits for its
members, so there is no incentive to collude
4.
Lure of higher profits will entice firms to
cheat on the cartel agreement.
g.
Company F is considering cheating on the cartel
agreement. Assuming company B doesnât cheat, Company B will produce
_______K_____(options for K = 15, 6,9,12,8,)
h.
and company F will produce ______M_________(options for M =
0,15,24,6,9,12,8)
i.
Then the equilibrium market quantity will be
____N______(options for N = 15,24,20,16,12,18)
j.
The equilibrium market quantity will be
____O______(options are = $16, $12, $17, $24, $20)
k.
Company B will make a profit of
________D__(options are $0, $54, $64, $36, $81, $96)
l.
Company F will make a profit of
________E__(options are $54, $64, $72, $81, $96, $144)