Economics Quiz 3 Multiple Choice Questions

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Description

Assume you are the manager of Abba Cable Company,
which provides commercial communication services to the town of Canyon Lake,
Texas. Because of licensing restrictions in the market, only your company and
two others (Babba and Cabba) are allowed to operate in this market. The three
companies decide to form a cartel and divide the market shares such that each
company will provide services that will maximize its profits. The licensing
restrictions allow each company to sell as much as it wants at a price ceiling
of $2,200. You have the following output and MC data for each company:

















































Output



MC ($)



Q



Abba



Babba



Cabba



1,000



2,500



2,600



2,700



2,000



2,400



2,300



2,500



3,000



2,200



2,100



2,300



4,000



2,100



5,000



2,100



6,000



2,500



2,300


  1. Calculate the industry output and market share at
    the current price of $2,200, assuming the prices are stable and unlikely to
    change.


  1. Assume the current prices in the market are challenged by the
    regulatory agency, resulting in a new maximum price of $2,000. How will
    this change the industry output and market share for each company?

  2. Is
    there any incentive for any company to cheat under either of the
    conditions in tasks a and b? Why or why not?

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