(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets.The market for gadgets is dominated by two producers, Margaret and Ray.Each firm can produce gadgets at a marginal cost of $0.The table shows the market demand schedule for gadgets.Suppose that these two producers have formed a cartel and are maximizing total industry profits.If Margaret decides to cheat on the agreement and sell 100 more gadgets, Margaret's price effect will be:
A)a decrease in profit of $400.
B)an increase in profit of $400.
C)an increase in profit of $250.
D)a decrease in profit of $250.

Question

Quizplus · Accepted Answer

If Margaret decides to sell 100 more gadgets, the total industry output will increase, leading to a decrease in the market price. Since Ray is also a part of the cartel, he will also lower his output to maintain the higher price agreed upon by the cartel. Thus, Margaret will face a lower price for all the gadgets she sells, not just the additional 100. As a result, her total revenue will decrease by more than the increase in cost, leading to a decrease in profit. The decrease in profit will be equal to the drop in revenue, which is $250 (100 gadgets x $2.5 decrease in price per gadget).

(Table: Demand Schedule for Gadgets) Look at the Table Demand