Question

In this exhibit (Monopoly Through Collusion), given the duopoly industry illustrated in the exhibit, if the two firms colluded to maximize their combined economic profits, the market price they would set would be _______ and combined economic profits of the firms would be _______ .

Answer 1

Answer:

c: P2; given by the area of the rectangle P1P2BG

Explanation:

Under monopoly, equilibrium is attained where firm's MC becomes equal to firm's MR. In the above diagram, this situation is satisfied 2 times i.e. at Q1 and Q2. This means market price may be P2 or P3 because MC = MR1 at equilibrium quantity Q1 and equilibrium price P3 while MC = MR2 at equilibrium quantity Q2 and price P2.

Economic profit of the firms is the total revenue minus total cost of the firm so it will be area above the MC curve i.e. either P1P2BG or P1P3AF.

But in the options there is presence of only P1P2BG. Therefore, (c) is the correct answer.