Suppose that there are only two firms in the petroleum market They give you some information about the petroleum market and you have to answer the questions below.
# Demand Equation: P = 110 - Q
# For each firm marginal cost MC = $20.
# [Quantity of outcome (qSA), Price (pSA), Profit (πSA)] , [Quantity of outcome (qKPC ), Price (pKPC), Profit (π KPC)].
# Q = qSA + qKPC
1-Suppose that the firms cooperate to act as a monopoly and want to form OPEC cartel in the market, then:
What do you think the objectives of this cartel?
Calculate the following in monopoly market and compare them with previous results:
i.Quantity of output.
ii.Price.
iii.Profit to each firm.
2- Suppose that one firm is expected to produce the same quantity in cartel contract. But another firm wanted to cheat, then:
In your opinion, what are the main incentives that push the firm to deviate and cheat?
Calculate the following for both firms:
Quantity of output.
Price.
Profit to each firm.
Explain the previous results.
3- Summarize this case in the pay-off matrix and decide what is the right behavior each firm will take in the market?