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Question

The market demand in a duopoly market is p= 30 -1.5 q. If the firms collude to form a cartel, how much would each firm supply? Assume that the cost of production is negligible for both firms.


A

30 units

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B

20 units

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C

15 units

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D

5 units

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Solution

The correct option is D

5 units


p= 30- 1.5 q
When the p=0, q=20. Hence, maximum market demand = 20.
When the firms collude, they act as a monopoly.
When the costs are zero, profit is maximized when the quantity supplied is half of the maximum market demand i.e. 10.

Hence, each firm would supply 5 units.


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