Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together. 2.00 10 Monopoly Outoome 10 Demand 140 1.00 MC-ATC 0.00 040 0.20 MR 40 0 120 180 20 0 a0 10 10 40 QUANTITY (Caa af beer) When they act as a profit-maximizing cartel, each company will produce cans and charge $ per can. Given this information, each firm earns a daily profit of so the daily total industry profit in the beer market is s Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement. Mays's deviation from the collusive agreement causes the price of a can of beer to per can. Mays's profit is now s to while McCovey's profit is now Therefore, you can condude that total industry profit when Mays increases its output beyond the collusive quantity.
Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together. 2.00 10 Monopoly Outoome 10 Demand 140 1.00 MC-ATC 0.00 040 0.20 MR 40 0 120 180 20 0 a0 10 10 40 QUANTITY (Caa af beer) When they act as a profit-maximizing cartel, each company will produce cans and charge $ per can. Given this information, each firm earns a daily profit of so the daily total industry profit in the beer market is s Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement. Mays's deviation from the collusive agreement causes the price of a can of beer to per can. Mays's profit is now s to while McCovey's profit is now Therefore, you can condude that total industry profit when Mays increases its output beyond the collusive quantity.
Chapter9: Monopolistic Competition And Oligoply
Section: Chapter Questions
Problem 16SQ
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Transcribed Image Text:Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly).
The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can.
Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC)
for each firm.
Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This
is only for convenience; nothing in this model requires that the two companies must equally share
the output.)
Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price
and combined quantity of output if Mays and McCovey choose to work together.
200
10
Monopoly Outoome
1.0
Demand
140
120
1.00
MC -ATC
0.20
MR
40
120 180 200 340 0 130 J0
QUANTITY (Caa af beer)
When they act as a profit-maximizing cartel, each company will produce
cans and
per can. Given this information, each firm earns a daily profit of
, so the daily total industry profit in the beer market is
charge $
Oligopolists often behave noncooperatively and act in their own self-interest even though this
decreases total profit in the market. Again, assume the two companies form a cartel and decide to
work together. Both firms initially agree to produce half the quantity that maximizes total industry
profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%,
while McCovey continues to produce the amount set under the collusive agreement.
Mays's deviation from the collusive agreement causes the price of a can of beer to
per can. Mays's profit is now s
to
while McCovey's profit is now
Therefore, you can condlude that total industry profit
when
Mays increases its output beyond the collusive quantity.
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