Consider the curve shown in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. (MC curve is horizontal because it is assumed that the fixed costs are 0 for all firms and the AVC is constant, so ATC=AVC=MC.)Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn?Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will the industry quantity and price be? What will the collective profits be of all firms in the industry?Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes. **Educational Text:****Title: Understanding Market Dynamics in Oligopolistic Industries**Consider the curve shown in the figure below, which illustrates the market demand and marginal revenue curve for firms in an oligopolistic industry. Here, it's assumed that the fixed costs are zero for all firms and the average variable cost (AVC) is constant, making the average total cost (ATC) also constant.**Diagram Explanation:**- The vertical axis represents the price (P), and the horizontal axis represents the quantity (Q).- The downward-sloping line labeled "Demand" illustrates how the quantity demanded decreases as the price increases.- The "Marginal Revenue" curve also slopes downward and lies below the demand curve, indicating that marginal revenue decreases with an increase in quantity sold.- A horizontal line labeled "Marginal Cost" represents the constant marginal cost for firms in this market.**Problem:**a. Suppose the firms collude to form a cartel. What price will the cartel charge?---This graph effectively demonstrates key concepts in oligopolistic market structures, including demand, marginal revenue, and marginal cost. Understanding these interactions is crucial in determining a firm's pricing and output strategies within such industries.

Given: ATC=AVC=MC and Fixed costs =0

Answered: Consider the curve shown in the figure…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the curve shown in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. (MC curve is horizontal because it is assumed that the fixed costs are 0 for all firms and the AVC is constant, so ATC=AVC=MC.)

Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn?
Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will the industry quantity and price be? What will the collective profits be of all firms in the industry?
Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

**Educational Text:**

**Title: Understanding Market Dynamics in Oligopolistic Industries**

Consider the curve shown in the figure below, which illustrates the market demand and marginal revenue curve for firms in an oligopolistic industry. Here, it's assumed that the fixed costs are zero for all firms and the average variable cost (AVC) is constant, making the average total cost (ATC) also constant.

**Diagram Explanation:**

- The vertical axis represents the price (P), and the horizontal axis represents the quantity (Q).
- The downward-sloping line labeled "Demand" illustrates how the quantity demanded decreases as the price increases.
- The "Marginal Revenue" curve also slopes downward and lies below the demand curve, indicating that marginal revenue decreases with an increase in quantity sold.
- A horizontal line labeled "Marginal Cost" represents the constant marginal cost for firms in this market.

**Problem:**

a. Suppose the firms collude to form a cartel. What price will the cartel charge?

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This graph effectively demonstrates key concepts in oligopolistic market structures, including demand, marginal revenue, and marginal cost. Understanding these interactions is crucial in determining a firm's pricing and output strategies within such industries.

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