Reference no: EM1311584
In 1991, Brazil and Columbia united to form a coffee cartel and reduce coffee output. Suppose total costs for the cartel are:
TC = 12 + 5Q + Q2
Here Q is millions of pounds of coffee. The market demand curve for coffee is:
P = 17 - Q
Here P is millions of dollars per million pounds. Suppose before the cartel was formed, output was 11 million pounds. In the Wall Street Journal a Columbian delegate to the cartel said that he believed that if the cartel reduced coffee output by 10%, the price would rise by 20%.
Calculate your price elasticity of demand based on the Columbian Delegates belief.
Given this price elasticity-what is the anticipated change in price as the result of an 10% decrease in output (remember monopolists and oligopolists control output not price; price is the result of output and demand)
Now-did the change in price resemble 20%
Compute the profit maximizing level of coffee output, the price the cartel should charge, the maximum cartel profits, and the price elasticity at the optimal output.
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