Cartel Equilibrium
The Hand Tool Manufacturing Industry Trade Association recently published the following estimates of demand and supply relations for hammers:
QD = 60,000 - 10,000P (Demand)
QS = 20,000P (Supply)
A. Calculate the perfectly competitive industry equilibrium price/output combination.
B. Now assume that the industry output is organized into a cartel. Calculate the industry price/output combination that will maximize profits for cartel members. (Hint: As a cartel, industry MR = $6 - $0.0002Q.)
C. Compare your answers to parts A and B. Calculate the price/output effects of the cartel.