Assume that there are 2 firms producing an identical product. Both firms have the same total cost function TC(q) =q2. The inverse demand function for the firms' output is p=120 Q, where Q is the total output and p is price.

1. What are the equilibrium price, output and profits of each firm if they are competing with each other? (Hint: Consider the equilibrium in a Cournot

game.) 

2. What happens if they form a cartel? Calculate the equilibrium price, output, and profits for the cartel? 

3. If a single firm created, what would its output and profits be, assuming the other firm maintains the cartel price? Calculate the new outputs and profits for bath firms: 

4. Discuss why it is hard to enforce a cartel. Explain using words. DO NOT do any calculations. DO NOT draw any graphs. 

5. What can the cartel members do to enforce the cartel agreement? Propose a method. Describe the method using words. DO NOT do any calculations. DO NOT draw any graphs. 

Answer rating: 100% (QA)

1The firms equilibrium output is q60 the equilibrium price is p120 and the equilibrium profits are 7200Explain more detail how you come to this conclu... View the full answer