Question

Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $. Further, your marginal costs are $. The previous cartel price was $10.00, when you and your competitor were price fixing. What price level do you now choose to maximize profits?
A. $10.05
B. $6.50
C. $10.00
D. $6.49
E. $6.48
F. $6.43

Answer 1

Answer and Explanation:

When there is price fixing between two competitors, if one competitor chooses to fix the price it should not exceed competutors marginal cost and should be above his marginal cost.

Since the price fixing of $10 will be fined then the ideal price to maximize the profit would be below the competitors price $ and above his marginal cost $.

The ideak price to maximize profits would be (competitors price $ + his marginal cost $)/2, This price would be above his marginal cost and below competitors price.