Chapter 15, Problem 1FT

Subpart (a):

To determine

The lure of the cartels.

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 price is determined by the interaction of demand and supply in the market. Price controls are government-controlled price mechanisms. The maximum and the minimum prices will be set under the price controls by the government in order to prevent overpricing and underpricing in the market, to protect the consumer’s as well as the producer’s interests.

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 monopoly and when the market is in a monopoly situation, the profit earned by the producer will be higher in margin. Thus, the area between the monopoly price and the competitive price multiplied with the monopoly quantity will give us the monopoly profit. It can be illustrated as follows:

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.

Economics Concept Introduction

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):

To determine

The lure of the cartels.

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:

$\begin{array}{c}\text{Monopoly profit}=\left(\text{Monopoly price}-\text{Average cost}\right)\times \text{Monopoly quantity}\\ =\left({\text{P}}_{\text{Monopoly}}-\text{AC}\right)\times {\text{Q}}_{\text{Monopoly}}\end{array}$

Economics Concept Introduction

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):

To determine

The lure of the cartels.

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:

$\begin{array}{c}\text{Monopoly profit per unit}=\text{Monopoly price}-\text{Marginal cost}\\ =0.70-0.40\\ =0.30\end{array}$

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:

$\begin{array}{c}\text{Total industry profit}=\text{Per unit profit}\times \text{Industry quantity demanded}\\ =0.30\times 300,000,000\\ =90,000,000\end{array}$

Thus, the total industry profit is equal to $90,000,000.

Economics Concept Introduction

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):

To determine

The lure of the cartels.

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:

$\begin{array}{c}\text{Profit of the cheater}=\text{Per lb profit}\times \text{Increased quantity}\\ =0.30\times 1,000,000\\ =300,000\end{array}$

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.

Economics Concept Introduction

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.