Question

abc and xyz agree to maximize joint profits. However, while ABC produces the agreed upon amount, XYZ breaks the agreement and each produce 5 more than agreed upon, how much less profit does each make

Answer 1

In a business context characterized by the prisoner's dilemma, firms ABC and XYZ face a trust issue, leading to both potentially making less profit by increasing outputs rather than cooperating and maximizing joint profits. A lack of trust and the temptation to cheat can result in each firm earning $400 instead of a higher profit, reflecting this classic economic dilemma.

Step-by-step explanation:

The scenario discussed here reflects a classic example of the prisoner's dilemma in a business context, particularly within the domains of economics and strategic management. When two firms, ABC and XYZ, agree to maximize joint profits by limiting their production, they face a trust issue. If one firm, say ABC, adheres to the agreement but XYZ produces more than agreed, it can lead to a reduction in the collective profit margin. If ABC assumes that XYZ will break the agreement, it might also increase output, leading to a situation where both firms earn a profit of $400, as illustrated by the bottom right-hand choice in the referenced table. However, if either of the firms believes the other will cooperate and thus chooses to cheat by increasing its output, the cheating firm could potentially make a profit of $1,500, while the cooperating firm stands to make a profit of $1,000 by sticking to the agreement.

The outcome typically results in both firms increasing their production due to the lack of trust and the incentive to cheat, which leads to a lower profit of $400 each. In these situations, both firms end up making less profit than they could have if they both cooperated to act like a monopolist and restricted their outputs as per the agreement.

Answer 2

The answer is "$ 140".

Step-by-step explanation:

The company produces the quantity MR = MC and if there is no quantity MR = MC, the amount throughout the case MR is just greater and closest to MC to maximize profit.

Here MR = marginal income and marginal cost =MC

MR =
`(Overall \ sales \ change)/(Quantity\ shift)`

In the above table, we could see that the amount MR = MC = 8 isn't available. Thus it produces the amount where the MR

is only larger but nearest to MC.

25 unit MR =
`(TR \ change)/(Quality \ change)`

`= [TR (when \ Q = 25) -TR ((when \ Q = 20)])/((25 - 20))`

`= ((450 - 400))/(5)= 10`

(Minimum and superior to MC)

MR of 30 units
`=((480 – 450))/((30–25))=6 <8 = MC`, similarly MR of 30 units.

Consequently, 25 units were produced and 12.5 units were produced.

Currently, XYZ breaks the agreement and produces three more so thus maximum quantity produced on a market = 25 + 5 = 30 and through the above table they see which if quantity = 30, price = 16.

XYZ produces 12.5 + 5 = 17.5 output from 30 units.

Cost Total = TVC + TFC

Total TVC = Total Cost for Variable TFC = Maximum Cost of TFC = 0.

If MC is stable, TVC = MC
`*` Q = 8
`*` q, where Q = exposed to the real produced and XYZ produces 17.5 in this case.

Total expenditure (TC+) is TVC = TFC = 8
`*` 17.5.

Take control = TR - TC = TC = 16
`*` 17.5 - 8
`*` 17.5 = 150.

So the business XYZ is profiting = 140