Consider an oligopoly with 5 firms. The market inverse demand curve is p=230- 4Q. The firms make identical products, have no fixed costs, and face a constant marginal cost of $30 per unit produced.
Suppose the 5 firms are engaged in Bertrand competition.
What is the equilibrium price?
How much output is made in total by the 5 firms?
How much output does each firm make?
How much profit does each firm earn?
Suppose the 5 firms form a cartel with each firm producing an equal share of the output.
How much output is made in total by the 5 firms?
How much output does each firm make?
What is the equilibrium price?
How much profit does each firm earn?
Show that any of the firms in the cartel could increase its profit if it cheated on the cartel agreement. Hint: assume that the other 4 firms abide by the cartel agreement.
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