The following equation represents the daily market demand for crude oil. Q = 10,

Question

The following equation represents the daily market demand for crude oil.
                    Q = 10, 000,000 - 500,000 P
                    Suppose there are four oil producers in the crude oil market, A, B , C and D. The marginal cost of A is $10. The marginal cost of B is $12. The marginal cost                     of C is 13. The marginal cost of D is $15. Note that in all three cases MC =AVC.
                    (Hint: Do not be concerned about fixed costs in this problem; assume TFC = zero for all producers.)
                    a. If collusion is not allowed, what kind of market arrangement do you think is likely to result from competitive interactions among these four firms?
                    b. Now suppose collusion is allowed. Is it possible for these firms to form an effective cartel?
                    c. Calculate the profits of these firms in either case (a and b).

Explanation / Answer

a)if collusion is not allowed,alternative market arrangement will result from the competitive interactions among these four firms because consumer can purchase from any of these oil producer.

b)no,it is not possible that these firm will form an effective cartel because different firm has different marginal revenue and if a cartel is formed then that will reduce the profit of those producers who has small marginal cost.

c)for both case a and b , answer will be same.

A = 10,000,000 - 500,000*10 = 5,000,000 .

B = 10,000,000 -500,000*12 = 4,000,000 .

C= 10,000,000 -500,000*13 = 3,500,000.

D = 10,000,000 -500,000*15 = 2,500,000

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