Use the following scenario to answer the following questions:
In 2011,three firms (Firm A,Firm B,and Firm C)were selling cellular phone service for a price of $40 per month in Playa del Carmen,Mexico.Each firm serviced 100 cell phone customers; thus,all firms together serviced a total of 300 customers.Assume marginal cost is $0 (zero)for all firms and thus total revenue is equal to total profit.In 2012,Firms A and B each continued to service 100 customers,but Firm C now serviced 150 customers; thus,all firms together serviced a total of 350 customers.All firms now charge $30 per month.
-Due only to the price effect,profits for each firm decline by $1,000.Due only to the output effect,profits for both Firm A and Firm B did not change,and profits for Firm C increased by $1,500.It was in Firm C's interest to increase output because Firm C realized only ________ of the total $3,000 price effect,but it realized the full ________ of the total quantity effect.
A)
$1,000; $1,500
B) $2,500; $1,500
C) $2,250; $1,500
D) $1,750; $1,250
E) $2,000; $1,250

Question

Quizplus · Accepted Answer

Firm C realized only $1,000 of the total $3,000 price effect because the price reduction from $40 to $30 resulted in a $1,000 loss for each firm due to the price effect. However, Firm C realized the full $1,500 of the total quantity effect because it was the only firm to increase its output, thus capturing the entire benefit of the increased output.

Use the Following Scenario to Answer the Following Questions