Question

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?

Answer 1

Answer: 357.50

Step-by-step 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.