Consider the following demand schedule for Rainbow Looms. Assume that the marginal cost of producing a Rainbow Loom is a constant $2.50. Note that when marginal cost is constant, average cost is constant. Fixed costs are assumed to be zero. Price($/Rainbow Loom)Quantity Demanded (Rainbow Loom )$17.500$15.0012$12.5042$10.0036$7.5048$5.0060b. Recall that a monopoly facing this demand schedule would produce 36 Rainbow Looms. If instead of a monopoly, a two-firm cartel controlled the Rainbow Loom market, how many Rainbow Looms would each firm want to produce in order to maximize industry profits?Each firm would produce. Rainbow Loomsc. Calculate each firm's profits if each firm produces output at the level you calculated in part b. Firm profits: $ Now suppose one firm decides to break from the cartel and produce 12 more units of output than what you calculated in part b. What are the deviating firm's profits now? What about the profits of the "cooperating" firm whose production levels stay at the agreed-upon quantity?Deviating firm's profits: $ Cooperating firm's profits: $
Consider the following demand schedule for Rainbow Looms. Assume that the marginal cost of producing a Rainbow Loom is a constant $2.50. Note that when marginal cost is constant, average cost is constant. Fixed costs are assumed to be zero. Price($/Rainbow Loom)Quantity Demanded (Rainbow Loom )$17.500$15.0012$12.5042$10.0036$7.5048$5.0060b. Recall that a monopoly facing this demand schedule would produce 36 Rainbow Looms. If instead of a monopoly, a two-firm cartel controlled the Rainbow Loom market, how many Rainbow Looms would each firm want to produce in order to maximize industry profits?Each firm would produce. Rainbow Loomsc. Calculate each firm's profits if each firm produces output at the level you calculated in part b. Firm profits: $ Now suppose one firm decides to break from the cartel and produce 12 more units of output than what you calculated in part b. What are the deviating firm's profits now? What about the profits of the "cooperating" firm whose production levels stay at the agreed-upon quantity?Deviating firm's profits: $ Cooperating firm's profits: $
Microeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter11: Price-searcher Markets With High Entry Barriers
Section: Chapter Questions
Problem 14CQ
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Transcribed Image Text:Consider the following demand schedule for Rainbow Looms. Assume that the marginal cost of
producing a Rainbow Loom is a constant $2.50. Note that when marginal cost is constant, average cost is
constant. Fixed costs are assumed to be zero. Price($/Rainbow Loom)Quantity Demanded (Rainbow Loom
)$17.500$15.0012$12.5042$10.0036$7.5048$5.0060b. Recall that a monopoly facing this demand schedule
would produce 36 Rainbow Looms. If instead of a monopoly, a two-firm cartel controlled the Rainbow
Loom market, how many Rainbow Looms would each firm want to produce in order to maximize industry
profits?Each firm would produce.
Rainbow Loomsc. Calculate each firm's profits if each firm
produces output at the level you calculated in part b. Firm profits: $
Now suppose one firm
decides to break from the cartel and produce 12 more units of output than what you calculated in part b.
What are the deviating firm's profits now? What about the profits of the "cooperating" firm whose
production levels stay at the agreed-upon quantity?Deviating firm's profits: $ Cooperating
firm's profits: $
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