Below is the reaction function diagram for an oligopoly. There are two firms each has the marginal cost of 4 and the demand function is P=20-2Q.What combined output do the firms need to produce for industry profits to be zero?

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BlackTom AI · Accepted Answer

First, restate the setup: two identical firms each have marginal cost MC = 4, and the market demand is P = 20 - 2Q, where Q = Q1 + Q2 is the total industry output. The question asks for the combined output that makes industry profits zero.

Key concept: in a simple competitive/zero-profit condition with linear demand and constant marginal cost, zero industry profit (economic profit = 0) occurs when the market price equals average total cost. Here, since MC = 4 is given and no fixed costs are specified, we can consider the zero-profit condition as the price equaling marginal cost, i.e., P = MC, which is a common benchmark in such problems.

Apply the zero-profit condition to the demand: set price equal to marginal cost:
- P = MC = 4.
- Using the demand function P = 20 - 2Q, substitute P = 4:
  4 = 20 - 2Q → 2Q = 16 → Q = 8.

Thus, the total industry output Q required for zero profits is 8.

Why this reasoning works here and what it implies for the other interpretations:
- If you tried to compute a Cournot or reaction-function equilibrium, you would get a particular Q1 and Q2 that sum to a total different from 8; those outputs maximize profits for each firm given the other’s output, but they do not necessarily yield zero profits unless price happens to equal marginal cost at that outcome.
- The problem explicitly asks for the output level that yields zero profits, not the Cournot equilibrium. Therefore equating price to marginal cost (P = MC) is the appropriate zero-profit condition in this context.
- There are no alternative answer options listed to compare against, but conceptually any method that does not enforce P = MC would not guarantee zero profits given the cost structure described.

ECON0015_ECON0013_ECON0014_25-26 Quiz 3b

Below is the reaction function diagram for an oligopoly. There are two firms each has the marginal cost of 4 and the demand function is P=20-2Q.What combined output do the firms need to produce for industry profits to be zero?

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