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Thread: Production- Firm and Industry

  1. #1
    Junior Member
    Jun 2010

    Production- Firm and Industry

    Hope someone can help...

    Suppose there are two firms producing DVD players. The average total cost and marginal cost of producing DVDs are the same for both firms, and are such that only two firms can exist in the industry. These cost curves are shown in Figure 1. The smallest production facility that can be built is with a minimum efficient scale of 350 DVDs. Figure 2 shows the marginal cost, demand and marginal revenue in the entire industry. Study both graphs and answer the questions below.

    a. At the competitive solution, how many DVDs will be produced? What is the profit in the entire industry and for each firm?

    250, each firm = (95 x 250) – (80 x 250) = 3,750, Industry = (100 x 500) – (80 x 500) = 10,000

    b. If both firms collude and form a joint monopoly, how many DVDs will be produced? What is the profit in the entire industry and for each firm?

    • 250 each or 500 in total
    • Entire industry profit:
    o (100 X 500) – (80 X 500) = 10,000
    • Each firm’s profit:
    o (95 X 250) – (80 X 250) = 3750

    c. If one firm decides to cheat and produce 100 more DVDs, the market price of a DVD drops to $90. Note that, according to Fig. 1, by doing this, the ATC for the cheating firm decreases to $80. Should the firm cheat?
    The cheating firm's
    TR = 350*90 = $31,500
    TC = 350*80 = $28,000

    the profit from cheating is $3,500 which exceeds the profit when cheating did not occur.

    If the other firm does not cheat it loses $1,250.

    So the firm should cheat.

    My answer for a and b are the same so I know one of them is wrong.

    I have also attached the graph for you guys/gals to look at.

    I have also attached a graph as well for you all to see.

    Thanks everyone.
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