Name: Andreas Audi Kemal Setiawan

Student ID: 29320112

Quiz #1 OLIGOPOLY

Question.

Consider the curve shown in Figure, which shows the market demand, marginal cost, and marginal
revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero
fixed cost.
a. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity
will the cartel supply? How much profit will the cartel earn?
b. Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as
possible by cutting the price and increasing sales. What will industry quantity and price
be? What will the collective profits be of all firms in the industry?
c. Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition
outcomes.

Answer.
a. Cartel is a group of firms that collude to produce the monopoly output and sell the
monopoly price. If the firms collude to form a cartel to reduce output and keep prices high,
they will act as a monopoly and choosing the quantity of output where MR = MC. From
assuming that fixed costs are zero and understanding the cost and profit, we can infer that
when the marginal cost curve is horizontal, and the average cost is the same as marginal
cost. Therefore, the cartel will earn positive economic profits equal to the area of a
rectangle, with a base equal to the monopoly quantity and height equal to the difference
between price and average cost. From the explanation above, we can see from the following
figure to clarify it.
Name: Andreas Audi Kemal Setiawan
Student ID: 29320112
b. If the cartel breaks up and the oligopolistic firms compete as vigorously as possible by
cutting the price and increasing sales, the firms should expand output and cut-price as long
as there are profits remaining. The long-run equilibrium will occur at the point where
average cost equals demand. As a result, the oligopoly will earn zero economic profits due
to “cutthroat competition” in the market. This will be explained in the following figure.

c.

Looking at the figure above, we can see that the Pc > Pcc and Qc < Qcc. This shows that
the cartel receives a positive and large profit. Whereas the profit for the cutthroat
competition is zero, because Pcc equals average cost, firms end up just breaking even.