Question

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 + q

2

q2

. Compare the competitive outcome with the cartel outcome. What is the individual firm's incentive to cheat on the cartel?

Answer 1

$P=100-2Q$

$TC=50+Q^2$

This means that each firm has $MC=2Q$

Setting $MC=P$ gives the individual firm's supply to the market:

$\implies 2Q=P$

$2Q=100-2Q$

$Q=25$