Table 17-9
The table shows the demand schedule for a particular product.
-Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4?
A)$6
B)$8
C)$10
D)$12

Question

Table 17-9
The table shows the demand schedule for a particular product. 
-Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4?
A)$6 
B)$8 
C)$10 
D)$12

Quizplus · Accepted Answer

In a cartel, firms act together as a monopoly and charge a higher price than the competitive market price. The competitive market price in this case would be $8, as determined by the intersection of the demand curve and the marginal cost curve. However, with a cartel, the two firms can increase the price above the competitive market price. To maximize their profits collectively, they would produce where their combined marginal cost equals the demand curve, which is at a quantity of 6 units. At a marginal cost of $4, the cost for each firm to produce 6 units would be $24 (6 x $4). To maximize their profits collectively, they would divide the revenue for these 6 units between them equally, which would be $60 ($10 x 6). Therefore, the cartel would charge a price of $10 per unit.

Table 17-9 The Table Shows the Demand Schedule for a Particular Product