The accompanying table shows the demand schedule for vitamin D. Suppose that the marginal cost of producing vitamin D is zero.
Price of vitamin D Quantity of vitamin
(per ton) D demanded (tons)
$8……………………………………. 0
7……………………………………… 10
6……………………………………… 20
5……………………………………… 30
4……………………………………… 40
3……………………………………… 50
2……………………………………… 60
1……………………………………… 70
a. Assume that BASF is the only producer of vitamin D and acts as a monopolist. It currently produces 40 tons of vitamin D at $4 per ton. If BASF were to produce 10 more tons, what would be the price effect for BASF? What would be the quantity effect? Would BASF have an incentive to produce those 10 additional tons?
b. Now assume that Roche enters the market by also producing vitamin D and the market is now a duopoly. BASF and Roche agree to produce 40 tons of vitamin D in total, 20 tons each. BASF cannot be punished for deviating from the agreement with Roche. If BASF, on its own, were to deviate from that agreement and produce 10 more tons, what would be the price effect for BASF? What would be the quantity effect for BASF? Would BASF have an incentive to produce those 10 additional tons?