Question

Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $ 6.72 . Further, your marginal costs are $ 6.70 . The previous cartel price was $10.00, when you and your competitor were price fixing.

Required:
What price level do you now choose to maximize profits?

Answer 1

Answer: The price level  chosen to maximize profits will be $ 6.71

Explanation:

Whenever there is price fixing between two competitors, and one of the competitor decides to choose a price level. Such competitor must ensure that the price level chosen to maximize profit does not exceed his or her competitor's marginal cost but can be  above his or her marginal cost .

Since the price fixing is $10 from previous cartel price so the best price level to maximize the profit would be less than my  rival's  price of   $ 6.72 and more than my  marginal cost of $ 6.70  which is $ 6.71