Monopoly vs Competition
You are given the following information about an industry consisting of 100 identical firms who all make
standard 12 inch black shoelaces:
The demand curve facing the industry is:
P = 75 - 0.10 Qd
The marginal revenue curve facing the industry is:
MR = 75 - 0.20 Qd
The marginal cost curve for an individual firm is:
MC = 15 +10 qf
The horizontal sum of the marginal cost curves of all the firms in the industry is: MC = 15 +0.10 Qd
(this is really the industry supply curve)
Use this information to answer the following questions:
A
Suppose the 100 firms operate in a perfectly competitive industry.
I
Graph a two panel diagram of this industry.
(HINT: graph industry demand and supply in one frame, determine the market
price and then graph the picture facing a single firm in another graph directly
next to it.)
II
Calculate the short run equilibrium price and quantity for the industry. Is the
industry in Long run equilibrium ? Why or why not? How much is each of the
100 firms producing?
B
Suppose all 100 firms form a cartel and act like a monopoly.
I
Draw a graph of this monopoly .
(HINT: graph industry demand, MR and supply in one frame. Where industry
supply is the horizontal sum of the individual MC curves)
II
Calculate the short run equilibrium price and quantity for the industry. Is the
industry in Long run equilibrium ? Why or why not?
C.
Compare the Cartel price and quantity outcomes with the Perfectly competitive Market price and
quantity outcomes. Calculate the Consumer Surplus and Producer Surplus under competition and
the cartel. Why is the total surplus lower with the cartel?
D
Is there an incentive for a firm to cheat in the cartel? Why?