Three firms sell solar-powered coffee roasters (a differentiated product) in international markets: Tall Technologies, Rio Grande R+D, and InVenti.   Tacit collusion among the members of this triopoly has led to a reactive pricing regime wherein price decreases by any individual firm are matched by its competitors, but price increases are not. All three firms are currently in a profit-maximizing equilibrium.

InVenti market researchers investigate the consequences for the firm of raising and lowering prices under this system. They conclude that if it raises the price, its monthly quantity demanded is determined by the relationship Q = 120 - (1/100)P, and if it lowers the price, the monthly quantity demanded is determined by the relationship Q = 60 - (1/250)P. InVenti’s total cost function is TC = 6000Q.

1. What are InVenti’s equilibrium output and price?     

2. In Figure B plot the segments of the two demand function relevant to the firm’s decision-making given reactive pricing.

3. In Figure B plot the decision-relevant segments of the marginal revenue curves associated with these demand functions and cross-hatch the firm’s overall marginal revenue relationship.

4. Plot InVenti’s marginal cost curve in Figure B.

5. Why do the slopes of the two demand relationships in Figure B differ? (An economic explanation please.)

6. To resolve a labor dispute, InVenti raises wages causing its total cost function to become TC = 7000Q. What are the equilibrium prices and quantity for the firm in this new situation?

Figure B