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Daisy and Petunia are flower vendors that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a bouquet of flowers is constant and equals $0.40 per bouquet. Assume that neither firm had any startup costs. That is, marginal cost equals average total cost (AC) for each firm. Suppose that Daisy and Petunia form a cartel, and the firms divide the output evenly. (Note: This is only for convenience, since nothing in the model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Daisy and Petunia choose to work together. Note: Drop lines will extend to both axes automatically. (?) 2:00 Monopoly Outcome 1.20 PRICE (Dollars per bouquet) 0.80 MC = AC MR Demand 40 80 120 180 200 240 280 320 308 230 QUANTITY (Bouquets of flowers per day) When they act as a profit-maximizing cartel, the total industry profit in the flowers market is per day. Suppose the flowers each company produces are regarded as perfect substitutes, such that if either company charged a price lower than the other, that company would receive all the business and profits in the industry. If both firms attempt to undercut each other, however, the result would be pricing at marginal cost and zero profit for both firms. The two firms Intend to operate together in this market indefinitely, and at the beginning of each day. both firms individually choose whether to continue charging the collusive price. A firm that undercuts in a given month will receive (almost) the entire monopoly profit in that period, but no profit in any future periods. If the probability that both firms will continue operating and charging the collusive price in the next period is 0.75, then the expected stream of profits for one firm in the collusive equilibrium is . Tacit collusion is therefore in this scenario. Suppose a third firm with the exact same costs and similarly substitutable flowers enters the market. If this firm joins the cartel, the expected stream of profits for an individual firm is now (again assuming a probability of 0.75 that production occurs in the next period). In this case, a tacit collusive agreement isflowers market is per day. butes, such that if 50 pany charged a price lower than the o oth firms attempt $64.00 t each other, however, the result woul $128.00 the beginning of ch firms individually choose whether t $192.00 h will receive (almr tire monopoly profit in that period, buthat company would receive all the business and profits in the industry. If both fi pricing at marginal cost and zero profit for $42.67 The two firms intend to operate together et indefinitely, and at the b $56.89 continue charging the collusive price. A fir ercuts in a given month will profit in any future periods. $170.68 $256.00 If the probability that both firms will conti ng and charging the collusiv for one firm in the collusive equilibrium is . Tacit collusion is therefe collusive price in the next period is 0.75, then the expected stree is therefore in this scenario. le flowers en possible If this firm joins the cartel, the exper probabi not possible uction occurs in the next period). In thThe two firms intend to operate together in this market indefinitely, and at continue charging the collusive price. A firm that undercuts in a given mont profit in any future periods. $42.67 $56.89 If the probability that both firms will c rating and charging the c for one firm in the collusive equilibrium $170.68 . Tacit collusion is $256.00 Suppose a third firm with the exact $8 nd similarly substitutable of profits for an individual firm is now (again assuming a pro tacit collusive agreement isIf the probability that both firms will continue operating and charging t for one firm in the collusive paullibrium is . Tacit collusic not possible Suppose a third firm with th losts and similarly substitute possible of profits for an individual fi (again assuming tacit collusive agreement is IF