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-Light’s 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 doesn’t 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)