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Handy Manufacturing Industry Trade Association recently published the following estimates of Demand and Supply relations for hammers

                                                    QD = 60,000 - 10,000P (Demand)

                                                   QS = 20,000P (Supply)

A. Graph both the Demand and Supply functions, calculating the intercepts for both functions. (Since Supply goes through the origin, there is only one intercept. For a second point for Supply, use the quantity calculated for the quantity intercept of the Demand curve.)

B. Calculate the perfectly competitive industry equilibrium price/output combination.

Now assume that the industry output is organized into a cartel. Calculate the industry price/output combination that will maximize profits for cartel members. (Hint: To do this, convert aggregate [market] supply back to aggregate marginal cost, (MC = P). Then from inverted Demand calculate the MR function. Then use profit maximizing condition for cartel, namely: MC = MR.

C. Table and compare your answers to parts A and B. Calculate the price/output effects of the cartel.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M91387986

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