# EOC 15 Solutions - 15 modern principles of economics modern...

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S-1What is the formula for this rectangle in terms of price, cost, and quantity?c.Let’s look at the market for one kind of apple: Gala. Assume that there are 300 produc-ers of Gala apples and thatMC5AC5\$0.40 per pound. In a competitive market,price will be driven down to marginal cost. Let’s assume that whenP5MC,eachapple grower produces 2 million pounds of apples for a total market production of 600million pounds. Now imagine that the apple growers form a cartel and each agrees tocut production to 1 million pounds, which drives the price up to \$0.70 per pound.Calculate profit per pound and total industry profit if the apple growers behave “as if”they were a monopoly and are able to produce according to the following table.PMonopolyQMonopoly\$0.70/lb300 million lbProfit perTotal industrypoundMonopolyprofitMonopoly______________MODERNPRINCIPLES:MICROECONOMICS1515MODERNPRINCIPLESOFECONOMICSOligopoly and Game TheoryFacts and Tools1.Let’s start off by working out a few examples to illustrate the lure of the cartel. Tokeep it simple on the supply side, we’ll assume that fixed costs are zero so marginalcost equals average cost. We’ll compare the competitive outcome (P5MC) towhat you’d get if the firms all agreed to act “as if” they were a monopoly. In allcases, we’ll use terms from the following diagram:DemandQuantityPriceMarginalrevenueMarginal cost =Average costPMonopolyPCompetitiveQMonopolyQCompetitivea.First, let’s see where the profits are. Comparing this figure with Figure 15.2,shade the rectangle that corresponds to monopoly profit.b.What is the formula for this rectangle in terms of price, cost, and quantity?c.Let’s look at the market for one kind of apple: Gala. Assume that there are 300 produc-ers of Gala apples and thatMC5AC5\$0.40 per pound. In a competitive market,price will be driven down to marginal cost. Let’s assume that whenP5MC,eachapple grower produces 2 million pounds of apples for a total market production of 600million pounds. Now imagine that the apple growers form a cartel and each agrees tocut production to 1 million pounds, which drives the price up to \$0.70 per pound.Calculate profit per pound and total industry profit if the apple growers behave “as if”they were a monopoly and are able to produce according to the following table.PMonopolyQMonopoly\$0.70/lb300 million lbProfit perTotal industrypoundMonopolyprofitMonopoly______________Cowen3e_CH15_Solutions.indd126/06/157:42 PM
S-2CHAPTER 15 Cartels, Oligopolies, and Monopolistic Competitiond.If a single apple grower broke from the cartel and produced an extra millionpounds of apples, how much additional profit (approximately) would this applegrower make?1. a.Q.
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