(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 $2.The table shows the market demand schedule for gadgets.If these two producers formed a cartel and acted to maximize total industry profits, each firm's output would be ________, and each firm's profit would be _ .
A)500; $2,500
B)200; $800
C)1,000; $500
D)1,000; $10,000

Question

Quizplus · Accepted Answer

If the two producers form a cartel and act to maximize total industry profits, they will act as a monopolist and jointly determine the quantity to produce that maximizes total profits. To do that, they would find the point where marginal revenue equals marginal cost, just like a monopolist would.

To find the quantity, we need to add up the quantities demanded by each firm at each price level: 
At a price of $8, total quantity demanded is 1000 gadgets (500 by Margaret and 500 by Ray).
At a price of $7, total quantity demanded is 1200 gadgets (600 by Margaret and 600 by Ray).
At a price of $6, total quantity demanded is 1400 gadgets (700 by Margaret and 700 by Ray).
At a price of $5, total quantity demanded is 1600 gadgets (800 by Margaret and 800 by Ray).
At a price of $4, total quantity demanded is 1800 gadgets (900 by Margaret and 900 by Ray).
At a price of $3, total quantity demanded is 2000 gadgets (1000 by Margaret and 1000 by Ray).
At a price of $2, total quantity demanded is 2200 gadgets (1100 by Margaret and 1100 by Ray).
At a price of $1, total quantity demanded is 2400 gadgets (1200 by Margaret and 1200 by Ray).

To maximize total industry profits, the two producers would produce 200 gadgets, where MR=MC=$4. At that quantity, price would be $4 and each firm would sell 100 gadgets.

Each firm's profit would be (P-ATC)*Q = (4-2)*100 = $200. Thus, each firm's profit would be $800 (= $200*4). Therefore, the answer is B.

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