(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.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 profit will be _______, and Ray's profit will be _.
A)$1500; $1,000
B)$900; $600
C)$1,400; $1,000
D)$1,000; $1,400

Question

Quizplus · Accepted Answer

If Margaret decides to cheat on the agreement and sell 100 more gadgets, the market quantity will increase from 500 to 600 gadgets. As a result, the market price will decrease from $10 to $8. According to the demand schedule, at a price of $8, the market demand for gadgets is 600 - this means that if both firms produce and sell 300 gadgets each, they will each earn a profit of $600. However, if Margaret cheats and produces and sells 400 gadgets while Ray sticks to the agreement and produces and sells 300 gadgets, Margaret's profit will be (400 gadgets x $6 per gadget) - ($2 marginal cost x 400 gadgets) = $1,400, while Ray's profit will be (300 gadgets x $6 per gadget) - ($2 marginal cost x 300 gadgets) = $600. Therefore, Margaret's profit will increase by $500, while Ray's profit will decrease by $400, hence the total profits will decrease from $1,200 to $1,100. Thus, B is the best choice as it shows the profits that Margaret and Ray would earn if Margaret cheated.

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