Question

Assume that a six-firm cartel supplies 500 million units of Whatailsya energy drink at a price of $5.00 per unit. Each firm supplies an equal share of the cartel's output. One firm decides to cheat and supplies 50 million extra units, causing the price of Whatailsya to decrease to $4.50 per unit. Assuming that the loss due to the fall in price is evenly spread across all firms in the cartel, what is the net gain for the cheating firm, in millions of dollars? Round your answer to the nearest million.

Answer 1

Answer:

The net gain for the firm cheating the cartel is US$ 183 million (rounding the answer to the nearest million).

Explanation:

1. Let's review all the information provided for solving this case:

Number of firms that supply  Whatailsya energy drink = 6

Amount of production of the cartel of six firms = 500 million units

Price of the energy drink = US$ 5

Amount of production of the firm that decided to break the cartel = 50 million extra units

Price after the extra production is sold = US$ 4.50

2. Let's find the individual production of each firm before and after the 50 million extra units and the net gains for the cheating firm.

Individual production of each firm of the cartel = Amount of production of the cartel/Number of firms

Individual production of each firm of the cartel = 500 million units/6

Individual production of each firm of the cartel = 83.33 million units

Individual sales of each firm before the 50 million extra units = Individual production * Price of the energy drink

Individual sales of each firm before the 50 million extra units = 83.333 million * 5

Individual sales revenue of each firm before the 50 million extra units = US$ 416.666 million

New production amount of the firm cheating the cartel = 83.333 + 50

New production amount of the firm cheating the cartel = 133.333 million units

Price of the energy drink after the extra production is sold = US$ 4.50

New sales revenue of the firm cheating the cartel = New production amount * Price of the energy drink after the extra production is sold

New sales revenue of the firm cheating the cartel = 133.333 million * 4.50

New sales revenue of the firm cheating the cartel = US$ 600 million

Net gain of the firm cheating the cartel = New sales revenue of the firm cheating the cartel - Individual sales of each firm before the 50 million extra units

Net gain of the firm cheating the cartel = 600 million - 416.666 million

Net gain of the firm cheating the cartel = 183.333 million

Net gain of the firm cheating the cartel = US$ 183 million (rounding the answer to the nearest million)