Table 17-7
The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16.
-Refer to Table 17-7. Assume there are two internet radio providers that operate in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that
A)each firm will charge a price of $40 and each firm will sell 3,000 subscriptions.
B)each firm will charge a price of $40 and each firm will sell 1,500 subscriptions.
C)each firm will charge a price of $32 and each firm will sell 2,000 subscriptions.
D)each firm will charge a price of $20 and each firm will sell 3,000 subscriptions.

Question

Table 17-7
The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. 
-Refer to Table 17-7. Assume there are two internet radio providers that operate in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that
A)each firm will charge a price of $40 and each firm will sell 3,000 subscriptions. 
B)each firm will charge a price of $40 and each firm will sell 1,500 subscriptions. 
C)each firm will charge a price of $32 and each firm will sell 2,000 subscriptions. 
D)each firm will charge a price of $20 and each firm will sell 3,000 subscriptions.

Quizplus · Accepted Answer

If the two internet radio providers collude, they will act as if they were a single monopolist in the market. In this case, they will jointly maximize their profit by producing the quantity that equates marginal revenue (MR) with marginal cost (MC), and then charge the price that corresponds to this quantity of subscription. The MR of the joint firm is given by the total revenue (TR) divided by the change in quantity, which is the sum of the own-price elasticities of demand of each firm. That is, MR = TR/ΣPED. In this case, the total revenue for each level of quantity is given by the price times the quantity (PQ). Therefore, we can derive the following table for each firm and for the joint firm:

| Quantity | Firm 1 TR | Firm 1 MR | Firm 2 TR | Firm 2 MR | Joint TR | Joint MR |
|----------|-----------|-----------|-----------|-----------|----------|----------|
| 1000     | 28000     | 28        | 16000     | 16        | 44000    | 22       |
| 1500     | 42000     | 28        | 24000     | 16        | 66000    | 22       |
| 2000     | 56000     | 28        | 32000     | 16        | 88000    | 22       |
| 2500     | 70000     | 28        | 40000     | 16        | 110000   | 22       |
| 3000     | 84000     | 28        | 48000     | 16        | 132000   | 22       |
| 3500     | 98000     | 28        | 56000     | 16        | 154000   | 22       |
| 4000     | 112000    | 28        | 64000     | 16        | 176000   | 22       |

From this table, we can see that the joint firm will maximize its profit by producing 3000 subscriptions and charging a price of $40 per subscription. This results in a total revenue of $120,000 and a total cost of $92,000, yielding a total profit of $28,000. Each firm will sell half of these subscriptions (1500 subscriptions) and share the profit equally. The price of $40 is higher than the marginal cost of $16, so there is room for the joint firm to make a profit. This outcome is better than the non-cooperative outcome, in which each firm would produce 2000 subscriptions and charge a price of $32. In that case, each firm would make a profit of $48,000, but the total profit for the market would be $96,000, which is lower than the joint profit of $28,000.

Table 17-7 The Information in the Table Below Shows the Total Demand