chapter
Oligopoly
1.
a.
If BASF produces 10 tons more, it now produces 50 tons and the price would fall
to $3 per ton. That is, on each of the 40 tons it was already producing, it would
lose $1. So the price effect is 40
×
($
−
1)
=
$
−
40. Since BASF produces an addi-
tional 10 tons and sells them at $3, the quantity effect is 10
×
$3
=
$30. So BASF
gains $30 revenue from producing 10 additional tons, but it loses $40 revenue
from producing those 10 additional tons. Since the marginal cost is zero, addi-
tional production does not change BASF’s cost. Since BASF loses revenue, it has no
incentive to produce the 10 additional tons.
b.
If BASF produces 10 tons more, the total produced is now 50 tons and the price
would fall to $3. That is, on each of the 20 tons it was already producing, it would
lose $1. So the price effect is 20
×
($
−
1)
=
$
−
20. Since BASF produces an addi-
tional 10 tons and sells them at $3, the quantity effect is 10
×
$3
=
$30. So BASF
gains $30 revenue from producing 10 additional tons, and it loses only $20 rev-
enue, resulting in an overall increase in revenue of $10. Since the marginal cost
is zero, there is no change to BASF’s cost. Since producing the 10 additional
tons raises BASF’s revenue by $10, BASF does have an incentive to produce 10
additional tons.
2.
a.
The accompanying table shows the total revenue and the marginal revenue for the
cartel. Since a cartel acts like a monopolist, it will maximize profits by producing
up to the point where marginal cost equals marginal revenue. For all gallons up to
2,000 gallons, marginal revenue is greater than marginal cost. Producing any
more would mean that marginal revenue is less than marginal cost. So the cartel
will produce 2,000 gallons and sell them at $80 each. Since the two families share
the market equally, each family has revenue of 1,000
×
$80
=
$80,000. The mar-
ginal cost per gallon is constant at $40, so the total cost (remember there is no
fixed cost!) of producing 1,000 gallons is $40,000. Each family therefore makes a
profit of $80,000
−
$40,000
=
$40,000.
125
15
Price of olive oil
Quantity of olive oil
(per gallon)
demanded (gallons)
Total revenue
Marginal revenue
$100
1,000
$100,000
$70
90
1,500
135,000
50
80
2,000
160,000
30
70
2,500
175,000
10
60
3,000
180,000
−
10
50
3,500
175,000
−
30
40
4,000
160,000
−
50
30
4,500
135,000
−
70
20
5,000
100,000
−
90
10
5,500
55,000
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