9781118041581

for dollar with cost. (Firms’ economic profits remain zero.) The

monopolist’s optimal response is to cut output (MR MC occurs at

lower Q) and pass on only part of the cost increase in the form of a

higher price. (For linear demand and cost, the price increase is one-half

the cost increase.)

4. OPEC maximizes its profit by setting MR MC. Thus, we have 120 4Q 
   20, implying Q 25 million barrels per day. In turn, P  120  50 
   $70 per barrel and (70 20)(25) $1,250 million per day. If the
   cartel overproduces by 20 percent, the new quantity is 30, the new price is
   $60, and OPEC’s profit falls to (60 20)(30) $1,200 million, a 4
   percent drop.

348 Chapter 8 Monopoly

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