Question

Q1. Brazil and Argentina are world’s only two countries producing Black Coffee. Suppose that the marginal cost of producing 1 quintal black coffee is constant at $1000, and demand for coffee (in quintals) is given by the schedule below: Price ($) Quantity 8000 5000 7000 6000 6000 7000 5000 8000 4000 9000 3000 10000 2000 11000 1000 12000 (i) If there were many suppliers of black coffee, what would be the equilibrium price and quantity? (ii) If there was only one supplier of black coffee, what would be the equilibrium price and quantity (iii) If Brazil and Argentina formed a cartel, what would be the price and quantity? If the countries split the market equally, what would be their profit and production? (iv) What would happen to Brazil’s profit if it increases its output by 1000, while Argentina sticks to the cartel agreement? (v) Use your answer in (iv) to explain why cartels are not usually successful

Answer 1

(i)

Many suppliers, means high competition.

Price will fall, Quantity demanded will increase.

$E_p=1000$

$E_q=12000$

(ii)

One supplier, means no competition.

Price will increase, Quantity demanded will fall.

$E_p=8000$

$E_q=5000$

(iii)

If the two countries form a cartel, the highest price will be charged in the market:

P=8000.

At this price, the quantity demanded:

Q=5000.

If the two countries split the market equally:

Produced quantity$=\frac{5000}{2}=2500.$