Table 17-11
Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost.
-Refer to Table 17-11. ABC and XYZ agree to maximize joint profits. However, while ABC produces the agreed upon amount, XYZ breaks the agreement and produces 5 more than agreed. How much profit does XYZ make?
A)$90
B)$140
C)$240
D)$280

Question

Table 17-11
Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. 
-Refer to Table 17-11. ABC and XYZ agree to maximize joint profits. However, while ABC produces the agreed upon amount, XYZ breaks the agreement and produces 5 more than agreed. How much profit does XYZ make?
A)$90 
B)$140 
C)$240 
D)$280

Quizplus · Accepted Answer

To maximize joint profits, ABC and XYZ would produce where their total quantity supplied equals the quantity demanded at the price where their marginal cost equals their marginal revenue. From the table, we can see that the quantity demanded at a price of $16 is 22 units. Thus, the total quantity supplied by ABC and XYZ combined should be 22 units.

Since both ABC and XYZ have the same marginal cost of $8, their marginal cost curve will coincide. From the table, we can see that at a quantity of 22 units, the market price is $16. At a market price of $16, both ABC and XYZ will have a marginal revenue of $8 as well.

If XYZ breaks the agreement and produces 5 more units than agreed, they will produce a total of 17 units. At a market price of $16, ABC will produce 5 units (to meet the agreed upon quantity of 22 units), while XYZ will produce 17 units (5 more than the agreed upon quantity).

The total quantity supplied will be 22 units, which is still equal to the quantity demanded at a price of $16. However, since the marginal cost of $8 is constant, the extra 5 units will generate additional profit for XYZ.

Profit = Total Revenue - Total Cost 
Total Revenue = Price x Quantity = $16 x 17 units = $272 
Total Cost = Marginal Cost x Quantity = $8 x 17 units = $136 
Profit = $272 - $136 = $136

Thus, XYZ will make a profit of $136 if they break the agreement and produce 5 more units than agreed upon.

Table 17-11 Only Two Firms, ABC and XYZ, Sell a Particular Product