Suppose that market demand can be represented as p = 100 - 2Q. ...

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Suppose that market demand can be represented as p = 100 - 2Q. There are 10 identical firms producing an undifferentiated product, each with the total cost function TC = 50 + q2. Compare the competitive outcome with the cartel outcome. What is the individual firm's incentive to cheat on the cartel?
 
  What will be an ideal response?

Question 2

In the short run, a competitive firm has a marginal product of labor, MPL = 5L-0.5. The output price is 10 per unit and the wage is 7 per hour. The short-run labor demand curve for the firm is
 
  A) 5L-0.5.
  B) 15L-0.5.
  C) 35L-0.5.
  D) 50L-0.5.

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Answer to Question 1

Each firm has MC = 2q, so that market supply is Q = 5p or joint MC = Q/5. As a cartel, they set joint MR = joint MC yielding 100 - 4Q = Q/5 or 100 = 4.2Q. Q = 23.8, and each firm will produce 2.38 units. The cartel price is 100 - 2(23.8 ) = 52.38. Each firm has the incentive to cheat because its marginal cost is 4.76 and the market price is 52.38. In a competitive market, supply equals demand. p = 100 - 2(5p) or 11p = 100. Price equals 9.09 and output equals 45.45 units.

Answer to Question 2

D