In a perfectly competitive industry, demand is: P=850-2Q And industry supply is

Question

In a perfectly competitive industry, demand is:

P=850-2Q
And industry supply is
P=250+4Q
The supply is simply the sum of the marginal cost curves of all the firms in the industry. Suppose that all the competitive firms collude to form one single monopoly firm. (Collusion changes neither the demand nor the cost conditions in the industry.) Discuss the economic effects of the change in market structure. More specifically, explain the possible changes in the market price and output of the commodity.

Explanation / Answer

Equilibrium occurs at demand = supply => 850 - 2Q = 250 + 4Q => 6Q = 600 => Q = 100 and P = 850 -2*100 = 650 When all firms collude, Sum of MC = supply = 250 + 4Q Demand is P = 850 - 2Q R = P*Q = (850 - 2Q)*Q = 850Q - 2Q^2 MR = dR/dQ = 850 - 4Q Firms will aim for max. profit. Hence for this, MR = MC => 850 - 4Q = 250 + 4Q => 8Q = 600 => Q = 75 and P = 850 - 2Q = 850 - 2*75 = 850 - 150 = 700 Hence, Q will decrease from 100 to 75 and P will increase from 600 to 700 (ANSWER) (This is what was expected under monopoly i.e. colluded position to one firm, output declines and price goes up)

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