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-(Table: Demand Schedule of Gadgets)Use Table: Demand Schedule of Gadgets.The market for gadgets consists of two producers,Margaret and Ray.Each firm can produce gadgets at a marginal cost of $2 and no fixed cost.Suppose that these two producers have formed a cartel,agreed to split production of output evenly,and are maximizing total industry profits.If Margaret decides to cheat on the agreement and sell 100 more gadgets,Margaret's profit will be _____,and Ray's profit will be _____.
A)$1500;$1,000
B)$900;$600
C)$1,400;$1,000
D)$1,000;$1,400

Question

Use the following to answer question: 
-(Table: Demand Schedule of Gadgets)Use Table: Demand Schedule of Gadgets.The market for gadgets consists of two producers,Margaret and Ray.Each firm can produce gadgets at a marginal cost of $2 and no fixed cost.Suppose that these two producers have formed a cartel,agreed to split production of output evenly,and are maximizing total industry profits.If Margaret decides to cheat on the agreement and sell 100 more gadgets,Margaret's profit will be _____,and Ray's profit will be _____.
A)$1500;$1,000 
B)$900;$600 
C)$1,400;$1,000 
D)$1,000;$1,400

Quizplus · Accepted Answer

If Margaret cheats and sells 100 more gadgets, the new market quantity will be 900 + 700 + 400 = 2000. At a price of $8, the total revenue will be $16,000. Margaret's new quantity sold will be 700 + 100 = 800, giving her revenue of $6,400. Her new cost will be 800 * $2 = $1,600, so her profit will be $6,400 - $1,600 = $4,800. Ray's quantity sold will be 600 - 100 = 500, giving him revenue of $4,000. His new cost will be 500 * $2 = $1,000, so his profit will be $4,000 - $1,000 = $3,000. Thus, Margaret's profit will be $4,800 and Ray's profit will be $3,000, for a total industry profit of $7,800. If they both stick to the agreement and produce 1500 gadgets each, their profit will be $7,200 each, for a total industry profit of $14,400. Since $7,800 is less than $14,400, Margaret's best choice is to cheat and sell 100 more gadgets.

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