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18 April, 07:00

Consider the oil-producing countries of A, B, and C. Each has a marginal cost of zero. World demand is given by Q = 1430 - P. Suppose the three countries form a cartel, and that none of them has an incentive to deviate from the cartel. By how many units lower is the total output of oil under the cartel relative to the Cournot solution?

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  1. 18 April, 09:46
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    Answer: 357.50

    Explanation:

    Under Cournot model that has three firms, each firm produces at

    q = (1430 - 0) / ((3+1) * 1)

    = 1430/4

    = 357.5 units

    Total output = 357.5 * 3

    = 1072.5 units

    Under cartel, the marginal revenue equals to the marginal cost.

    MR = MC = 0

    1430 - 2Q = 0

    Q = 1430/2

    Q = 715 units

    Difference = 1072.5 units - 715 units

    = 357.5 units

    Hence the units are 357.50 units lower in cartel compared to Cournot.
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