Table 17-7. The table shows the demand schedule for a particular product.

-Refer to Table 17-7.Suppose the market for this product is served by two firms who have formed a cartel and are colluding to set the price and quantity in this market.If the marginal cost to produce this product is constant at $2 per unit,then what price will the cartel set in this market?
A) $4
B) $5
C) $6
D) $7

Question

Table 17-7. The table shows the demand schedule for a particular product.
 
-Refer to Table 17-7.Suppose the market for this product is served by two firms who have formed a cartel and are colluding to set the price and quantity in this market.If the marginal cost to produce this product is constant at $2 per unit,then what price will the cartel set in this market?
A) $4 
B) $5 
C) $6 
D) $7

Quizplus · Accepted Answer

In order to maximize their profits, the cartel will want to set the output level where the marginal cost equals the marginal revenue. Since the marginal cost is constant at $2 per unit, we can find the output level by subtracting the marginal cost from the demand equation: Q = 20 - P - 2. Setting the marginal revenue equal to the marginal cost, we get: 20 - 2Q = 2. Solving for Q, we get Q = 9. Substituting Q = 9 into the demand equation, we get P = 20 - Q - 2 = 9. Therefore, the price the cartel will set is $6.