Assume that two companies (A and B) are duopolists who produce identical products. Demand for the products is given by the following linear demand function:P=400QAQBP=400QAQBwhere QAQAand QBQBare the quantities sold by the respective firms and P is the selling price. Total cost functions for the two companies are

TCA=1,500+110QA+QA2TCA=1,500+110QA+QA2

TCB=1,200+40QB+2QB2TCB=1,200+40QB+2QB2

Assume that the firms form a cartel to act as a monopolist and maximize total industry profits (sum of Firm A and Firm B profits). In such a case, Company A will produce _______ units and sell at $_____.

Similarly, Company B will produce ____ units and sell at $______.

At the optimum output levels, Company A earns total profits of $_______and Company B earns total profits of $______. Therefore, the total industry profits are $______.

At the optimum output levels, the marginal cost of Company A is _____ and the marginal cost of Company B is ____).

The following table shows the long-run equilibrium if the firms act independently, as in the Cournot model (i.e., each firm assumes that the other firm's output will not change).Cournot Equilibrium

	Price	Output	Profits
($)	(units)	($)
Company A	290	60	5,700
Company B	290	50	6,300
Total Industry		110	$12,000

Compare the optimal solutions obtained in this exercise with the Cournot equilibrium given in the preceding table. What happens to the optimal selling price, total industry output, and total industry profits when the two firms form a cartel instead of acting independently?

	Increase	Decrease	No change
Selling price
Total industry output
Total industry profits