Chapter 9 – Case Problem Set A

1. An oligopolist has the following linear marginal cost curve: MC = 1 + 0.5 Q

At prices below $5, the firm faces the following demand curve: Q = 9 - P
At prices above $5, the firm faces the following demand curve: Q = 24 - 4 P
Plot the firm's kinked demand curve and marginal revenue curve and the firm's
marginal cost curve on the graph below.

Chapter 9: Problem 1

5
Price, MR, MC

0
0 1 2 3 4 5 6 7 8 9
Quantity (Q)

Within what range of marginal cost will the firm maintain the same price and
level of output?

Managerial Economics: Principles and Worldwide Applications, 7th Edition

The managers of General House and Westing Electric, two competing firms that sell
products that are virtually identical, have decided to form a secret agreement. They intend
to cooperate in setting prices and to adjust their output accordingly. They have the
following cost curves:
General House: MC = 1/2 + Q ATC = 1/2 + 1/2 Q
Westing Electric: MC = 1/2 + Q/3 ATC = 1/2 + Q/6
They face the following industry demand curve: Q = 16 - 2 P
Use this information to solve Problems 2 and 3.

2. Plot the industry demand, marginal revenue, marginal cost, and average total cost
on the graph below. Use the graph to determine industry price and output under
the assumption that each firm is maximizing profit without cooperating with the
other (that the industry is competitive) and then calculate each firm's total
revenue, total cost and profit.

Chapter 9: Problem 2

8
7
6
Price, MR, Cost

5
4
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity (Q)

Managerial Economics: Principles and Worldwide Applications, 7th Edition

3. Now assume that the two firms decide to behave as a centralized cartel.
Determine industry price and output and then calculate each firm's total revenue,
total cost and profit. Are both of the firms better off than they were when they
were competing? Why or why not?

Managerial Economics: Principles and Worldwide Applications, 7th Edition