AP ECONOMICS

AP ECONOMICS

The market for olive oil in New York City is controlled by two families, the Sopranos and the Contraltos. Both families will ruthlessly eliminate any other family that attempts to enter the New York City olive oil market. The marginal cost of produc- ing olive oil is constant and equal to $40 per gallon. There is 4. Price of vitamin D Quantity of vitamin D (per ton) demanded (tons) Price of olive oil Quantity of olive oil (per gallon) demanded (gallons) Quantity of bottled Price of bottled water water demanded (per liter) (millions of liters) Summary 675 a. Suppose the two firms form a cartel and act as a monopo- list. Calculate marginal revenue for the cartel. What will the monopoly price and output be? Assuming the firms divided the output evenly, how much will each produce and what will each firm’s profits be? b. Now suppose Perrier decides to increase production by 1 million liters. Evian doesn’t change its production. What will the new market price and output be? What is Perrier’s profit? What is Evian’s profit? c. What if Perrier increases production by 3 million liters? Evian doesn’t change its production. What would its out- put and profits be relative to those in part b? d. What do your results tell you about the likelihood of cheat- ing on such agreements?

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