Answer to Question #85023 in Microeconomics for Dylan

Question

Consider a city that has several hot dog vendors operating in the downtown area. Suppose that each vendor has an identical constant marginal cost of $1 up to 150 hot dogs per day but its marginal cost surges to a constant level of $5 for the units after 150 hotdogs a day. A vendor’s fixed cost-for the vending cart-is all sunk. The vendors of course are profit-maximizers.
Let us get back to a daily situation, i.e. short run situation. Suppose the daily market demand for hot dogs is Q = 5,000 – 1,000P, in which P denotes the price per hotdog & Q denotes the total number of hot dogs demanded a day at price P. Each vendor’s marginal cost is the same as before. Suppose also that, due to its new environmental law, the city has decided to regulate the hot dog market by issuing the business permit only to 20 vendors. And, as a response, the 20 vendors with permits managed to form a cartel to coordinate their pricing and improve their profits. How much of deadweight loss a day would the cartel cause to the market?

Answer 1

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