11. The market for olive oil in New York City is controlled by two families, the

Question

11. The market for olive oil in New York City is controlled by two families, the Sopranos and the Contraltos. Both families will ruthlessly eliminate any other family that attempts to enter the New York City olive oil market. The marginal cost of producing olive oil is constant and equal to $40 per gallon. There is no fixed cost. The accompanying table gives the market demand schedule for olive oil Quantity of olive oil demanded (gallons) 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 Price of olive oil (per gallon) $100 90 80 70 60 50 40 30 20 10

Explanation / Answer

Contraltos and the Sopranos now sell 1,500 gallons each,

Total output= 3,000 gallons,

The price will fall to $60 per gallon.

revenue 1,500×$60=$90,000

cost of 1,500×$40=$60,000.

Profit =$90,000-$60,000=$30,000

Price of Olive oil Quantity of Olive oil TR=PQ MR=Change in TR/Change in Quantity 100 1000 100000 100 90 1500 135000 70 80 2000 160000 50 70 2500 175000 30 60 3000 180000 10 50 3500 175000 -10 40 4000 160000 -30 30 4500 135000 -50 20 5000 100000 -70 10 5500 55000 -90

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