Consider a market of two firms with demand given by P = 400 – Q. Each firm has a constant marginal cost of $50. Competition is characterized by making simultaneous profit-maximizing quantity decisions
a. Collusion requires both firms to act in unison. Suppose that Firm 1 thinks that Firm 2 is going to produce one-half of the market monopoly output (the value of which you found in part b). Using Firm 1’s best response function, what would Firm 1’s profit-maximizing output be if it decided to act alone? What does this suggest about the long-term likelihood of colluding to set production levels?
