Question

Industry demand is given by: QD = 1000 - P All firms in the industry have identical and constant marginal and average costs of $50 per unit. If the industry is perfectly competitive, what will industry output be? What will be the equilibrium price? What profit will each firm earn? Now, suppose that there are five firms in the industry and they collude to set the price. What price will they set? What will be the output of each firm? What will be the profit of each firm?

Answer 1

With industry demand at Q=1000-P, we thus have the price set at P=1000-Q. Now in a perfectly competitive industry we operate where P=MC. Thus in this case we have 1000-Q=50. Thus we have the industry output at Q=950. The price will be the same as the marginal cost in a perfectly competitive industry. So we have P=50. In a perfectly competive industry firms do not earn supernormal profits in the long run and so they will only earn normal profits. In case five firms collude to set the price, then they will want to maximize the group profits. Each firm under collusion will make up an equal share of the industry output and so Q=200 for each firm. The price will be the monopolistic price based on profit maximization and the profit for each firm will be equal based on the group profit maximization.