24. The partnership of Robbi, Alex, and Ned has the following trial balance on S

Question

24. The partnership of Robbi, Alex, and Ned has the following trial balance on September 30, 20X9: Debit Credit Cash Accounts Receivable (net) Inventory Plant and Equipment (net) Accounts Payable Rachel, Capital Adams, Capital Nixon, Capital Total $20,000 30,000 35,000 215,000 $40,000 120,000 90,000 50,000 -300.000-300,000 The partners share profits and losses as follows: Robbi, 50 percent; Alex, 30 percent, and Ned, 20 percent. The partners are considering an offer in which the cash will be paid to creditors and then to the partners in installments. The partners wish to keep $5,000 on hand to pay for potential liquidation expenses. Required: (6 pts) Prepare a cash distribution plan as of September 30, 20X9, showing how much cash each partner will receive if the offer to sell the assets is accepted.

Explanation / Answer

a) When the two firms collude there will be a single marginal cost.

MCA = 2qA and MCB = 2qB

qA = MCA/2 and qB = MCB/2

Total quantity produced = Q = MCA/2 + MCB/2 = MC

Hence MC = Q

MR = 60 - 2Q

Find the profit maximizing quantity

MR = MC

60 - 2Q = Q

Q* = 20 and so qA = qB = 10 units, price is P = 60 - 20 = 40. Profits for each firm is = TR - TC = (40*10 - 10 - 10^2) $290

b) Cournot outcome has both firm using their best response functions as

MRA = MCA MRB = MCB

60 - 2qA - qB = qA 60 - 2qB - qA = qB

qA = 20 - (1/3)qB and qB = 20 - (1/3)qA

Solve them to get qA = qB = 15 units and price = 60 - 30 = $30. Profits are (30*15 - 10 - 15^2) = $215. See that Cournot equilibrium has lower profit per firm so it is not preferred over collusion

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