Suppose that the marginal cost of mining gold is constant at $300 per ounce and the demand schedule is as follows: a. If the number of suppliers is large, what would be the price and quantity? b. If there is only one supplier, what would be the price and

a. If the number of suppliers is large, the market will reach equilibrium where the marginal cost equals the marginal revenue. In this case, the marginal cost is constant at $300 per ounce. Looking at the demand schedule, the quantity demanded is highest at a price of $500 per ounce, with a demand of 6,000 ounces. At this price, the total revenue would be $3,000,000. Therefore, in a competitive market with many suppliers, the price would be $500 per ounce and the quantity would be 6,000 ounces. b. If there is only one supplier, that supplier would have market power and can set any price they choose to maximize profits. The profit-maximizing price would be where marginal cost equals marginal revenue. As the marginal cost is constant at $300 per ounce, the supplier would set the price at $700 per ounce, where the demand is 4,000 ounces. The quantity supplied would be 4,000 ounces and the total revenue would be $2,800,000. c. If there are only two suppliers and they form a cartel, they can act together as a monopolist and set the price and quantity to maximize their joint profits. They would restrict output to reduce supply and increase the price. The profit-maximizing quantity would be where the marginal cost equals the marginal revenue of the joint monopoly. As the total cost of the two suppliers would be $600 per ounce (2 x $300 per ounce), the marginal cost would be $600 per ounce. The marginal revenue can be calculated by summing the quantities demanded at each price point until the total quantity equals the quantity supplied by the two suppliers. At a price of $800 per ounce, the total quantity demanded is 3,000 + 4,000 = 7,000 ounces, which is the same as the quantity supplied by the two suppliers. The marginal revenue at this point would be $800 per ounce. Therefore, the price would be $800 per ounce and the quantity would be 7,000 ounces. d. If one of the two cartel members decides to increase its production while the other member keeps its production constant, the total quantity supplied would increase, and this would cause a downward pressure on price. Assuming the supplier who increases production sells their additional 1,000 ounces at the same price of $800 per ounce, the new quantity supplied by the cartel would be 8,000 ounces. The new price would be where the demand curve intersects the new supply curve at 8,000 ounces. This would occur at a price of $700 per ounce, where the total revenue of the cartel would be $5,600,000. The revenues of the member who increased production would increase as they now sell an additional 1,000 ounces, but the revenues of the other member who kept production constant would decrease, as they now receive a lower price of $700 per ounce instead of $800 per ounce.