Industry demand is given by: QD = 1000 €“ P All firms in the industry

Industry demand is given by: QD = 1000 €“ P

All firms in the industry have identical and constant marginal and average costs of $50/unit.

a. If the industry is perfectly competitive, what will industry output be? What will be the equilibrium price? What profit will each firm earn?
b. Now suppose that there are five firms in the industry, and that they collude to set price. What price will they set? What will be the output of each firm? What will be the profit of each firm?

ANSWER

a. P = 50, so Q = 950. Each firm earns an economic profit of zero.
b. MR = 1000 – 2Q. Set MR = MC
50 = 1000 – 2Q
Q = 475
P = $525
Each firm produces 1/5 the output, or q = 95. Profit for each firm is $45,125.