(Table: Demand for Solar Water Heaters) Use Table: Demand for Solar Water Heaters.The marginal cost of producing solar water heaters is zero,and only two firms,Rheem and Calefi,produce them.Suppose they agree to produce only 25 water heaters each.If Rheem cheats on the agreement and produces 30 water heaters,what is the price effect for Rheem?

A) -$1,000
B) -$2,500
C) $2,000
D) $1,000

Question

Kristal Havins · Accepted Answer

Final Answer : B, Explanation :  According to the table, when the quantity supplied is 50, the equilibrium price is $5,000. If each firm produces 25 heaters, the total quantity supplied will be 50, which is the equilibrium quantity. However, if Rheem produces 30 heaters, the total quantity supplied will be 55, which is greater than the equilibrium quantity, leading to a decrease in price. The price effect can be calculated by finding the difference between the new equilibrium price and the original equilibrium price:Qd=100-2PQs1=50 (each firm produces 25 heaters)100-2P=50P=$25,000Qs2=55 (Rheem produces 30 heaters and Calefi produces 25 heaters)100-2P=55P=$22,500The price effect for Rheem is the difference between the price it would have received if it had stuck to the agreement and the price it actually receives after cheating:$25,000-$22,500=$2,500Therefore, the answer is B.

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