Tackle the Test: Free-Response Questions

1. Question

   Refer to the table provided to answer the following questions. Assume that marginal cost is zero.

   
   

   Demand Schedule

   
   

   
   

   
   

   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

   Price	Quantity
   $24	0
   22	1
   20	2
   18	3
   16	4
   14	5
   12	6
   10	7
   8	8
   6	9
   4	10
   2	11
   0	12

   
   

   
   

   
   

   1. If the market is perfectly competitive, what will the market equilibrium price and quantity be in the long run? Explain.

      
      
   
   

   2. If the market is a duopoly and the firms collude to maximize joint profits, what will market price and quantity be? Explain.

      
      
   
   

   3. If the market is a duopoly and the firms collude to maximize joint profits, what is each firm’s total revenue if the firms split the market equally?

      
      
   
   

   Rubric for FRQ 1 (7 points)

   1 point: If the market is perfectly competitive, price will be zero.

   1 point: If the market is perfectly competitive, quantity will be 12.

   1 point: Price equals marginal cost in the long-run equilibrium of a perfectly competitive market, so price will be zero, at which price the quantity is 12.

   1 point: If the market is a duopoly, price will be $12.

   1 point: If the market is a duopoly, quantity will be 6.

   1 point: In order to maximize joint profits, the two firms would act as a monopoly, setting marginal revenue equal to marginal cost and finding price on the demand curve above the profit-maximizing quantity. Marginal revenue passes through zero (going from 2 to −2) after the 6th unit, making 6 the profit-maximizing quantity. The most consumers would pay for 6 units is $12, so that is the profit-maximizing price.

   1 point: Total revenue is $12 × 6 = $72. By dividing this equally, each firm receives $36.

2. Question

   
   

   1. What are the two major reasons we don’t see cartels among oligopolistic industries in the United States?

      
      
   
   

   2. Explain why firms in an oligopoly are interdependent, but firms in a perfectly competitive market or a monopoly are not.(4 points)

      
      
   
   

   Rubric for FRQ 2 (4 points)

   1 point:The first major reason is that cartels are illegal in the United States.

   1 point:The second major reason is that cartels set prices above marginal cost, which creates an incentive for each firm to cheat on the cartel agreement in order to make more profit. This incentive to cheat tends to cause cartels to fall apart.

   1 point:Firms in an oligopoly are interdependent because in an industry with only a small number of firms, the outcome for each firm depends on the behavior of other firms.

   1 point:In a perfectly competitive market, there are so many firms that no one firm has a significant influence on the outcome of other firms. A monopoly has only one firm, so interdependence is not an issue.