Subpart (a):
The lure of the cartels.
Subpart (a):
Explanation of Solution
The market is a structure where there are buyers who buy and sellers who sell and there is an exchange of goods and services between them. The
The profit of a firm is the excess revenue left with the firm after deducting the total cost of production from the total revenue of the firm that is generated through the sale of the goods and services. Here, in the case of the firm, the case is
Here, the monopoly price is higher than the competitive price; this means that the firm earns higher than the marginal cost and the average cost (which is the profit per unit). When it is multiplied with the monopoly quantity, it gives us the profit of the monopolist.
Concept introduction:
Cartel: A cartel is an association or organization of suppliers or producers, which has the main intention of keeping the prices of the commodities that they produce high and reducing the competition between them.
Market: The market is a structure where there are buyers who buy and sellers who sell and there is an exchange of goods and services between them. The price is determined by the interaction of demand and supply in the market.
Subpart (b):
The lure of the cartels.
Subpart (b):
Explanation of Solution
When the size of the monopoly profit has to be calculated, the area can be calculated by subtracting the average cost of the firm (which is also equal to the marginal cost) and competitive price from the monopoly price, and multiplying it with the monopoly quantity. It is the area of the monopoly profit which can be explained in the following formula:
Concept introduction:
Cartel: A cartel is an association or organization of suppliers or producers, which has the main intention of keeping the prices of the commodities that they produce high and reducing the competition between them.
Market: The market is a structure where there are buyers who buy and sellers who sell and there is an exchange of goods and services between them. The price is determined by the interaction of demand and supply in the market.
Subpart (c):
The lure of the cartels.
Subpart (c):
Explanation of Solution
It is given that the monopoly price is equal to $0.70/lb and the marginal cost of production (which is equal to the average cost of production and the competitive price) is $0.40/lb. The monopoly quantity demanded is given as 300 million lb. Thus, the monopoly profit per unit can be calculated by subtracting the average cost from the monopoly price as follows:
Thus, the monopoly profit per unit is $0.30/lb. Similarly, the total industry profit can be calculated by multiplying the monopoly per unit profit with the total monopoly quantity demanded as follows:
Thus, the total industry profit is equal to $90,000,000.
Concept introduction:
Cartel: A cartel is an association or organization of suppliers or producers, which has the main intention of keeping the prices of the commodities that they produce high and reducing the competition between them.
Market: The market is a structure where there are buyers who buy and sellers who sell and there is an exchange of goods and services between them. The price is determined by the interaction of demand and supply in the market.
Subpart (d):
The lure of the cartels.
Subpart (d):
Explanation of Solution
When the monopoly market is in operation, each producer earns $0.30/lb of apples. When everything remains the same and one single producer cheats the cartel by increasing the production by 1,000,000 pounds of apples, it will increase the profit of the producer. This can be calculated by multiplying the per-unit profit with the increased quantity as follows:
Thus, the cheating producer earns approximately $300,000 additionally, through cheating. The extra profit made is approximate because the increase in the quantity will push the prices down in the market. Since the increase in the quantity is only 1/300th of the market, the impact on the price would be lower.
Concept introduction:
Cartel: A cartel is an association or organization of suppliers or producers, which has the main intention of keeping the prices of the commodities that they produce high and reducing the competition between them.
Market: The market is a structure where there are buyers who buy and sellers who sell and there is an exchange of goods and services between them. The price is determined by the interaction of demand and supply in the market.
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Chapter 15 Solutions
Modern Principles: Microeconomics
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