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Determining an optimal allocation of output

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An illegal cartel has been formed by three leading ready-mix cement suppliers in the local market. Total costs at various levels of service per day are as follows:

Total Cost ($000)
Daily Output
(000 cu. yds.) Ready Mixes, Inc. Concrete ProductsCo. Hard Stuff, Inc.
0 $ 2 $ 3 $ 0
1 12 14 8
2 21 23 17
3 29 30 27
4 36 41 38
5 47 53 50

A. Construct a table showing the marginal cost of production per firm.

B. From the data in part A, determine an optimal allocation of output and maximum profits if the cartel sets Q = 10(000) and P = $10.

C. Is there an incentive for individual members to cheat by expanding output when the cartel sets Q = 10(000) and P = $9?

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Solution Summary

Solution describes the steps to determine an optimal allocation of output and maximum profits in the given scenario.

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Please refer attached file for better clarity of tables.

A. Construct a table showing the marginal cost of production per firm.

Total Cost ($000)
Daily Output Ready Mixes, Inc. Concrete ProductsCo. Hard Stuff, Inc.
(000 cu. yds.) Total Cost MC ($/cu yard) Total Cost MC ($/cu yard) Total Cost MC ($/cu yard)
0 $2 $3 $0
1 12 10 14 11 8 8
2 21 9 23 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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