Assume the following demand and supply equation for a pesticide market: Qd 30,00

Question

Assume the following demand and supply equation for a pesticide market: Qd 30,000-5000P Qs= 10.000P a. Calculate the perfectly competitive industry equilibrium price and output b. Assume that the firms in this industry organized into a cartel. Calculate the industry output and price c. Compare your answers for items a and b. Briefly describe the effect that organizing into a cartel had on price and output. TT! Paragraph Arial 3(12pt) '·-·- ' HTHL CSS Words:0 Path p QUESTION 2 f its rival, Blue Corporation, decides to advertise its product, KLM will make S4 million if it advertises and $2 million if it does not advertise If Blue Corporation does not advertise, KLM will make $5 million f it advertises and $3 milion it it does not a Is it possible to construct a payoff matrix? Explain b. Does KLM have a dominant strategy? Your response must be a minimum of 200 words Click Save and Submit to save and submit. Click Save All Answers to savel dn answers Save All Answe

Explanation / Answer

a) A perfectly competitive market has equilibrium where Qs = Qd

10000P = 30000 – 5000P

15000P = 30000

P = $2 and Q = 20000 units.

Hence the equilibrium price is $2 and equilibrium quantity is 20000 units.

b) Find the inverse demand as 5000P = 30000 – Q or P = 6 – 0.0002Q. This gives total revenue function TR = PQ = 6Q – 0.0002Q^2. Then the marginal revenue function MR = 6 – 0.0004Q and MC = Q/100000 or MC = 0.0001Q. Now a cartel produces where MR = MC. This gives 6 – 0.0004Q = 0.0001Q or Q = 12000 units and price P = $3.6. Industry output is 12000 units and price is $3.6.

c) Note that if the two markets are compared, cartel produces less and charges more. This is due to the market power a cartel has over the market.

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