2. Deviating from the collusive outcome Mays and McCovey are bear-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. Ⓡ PRICE (Dollars per can) 200 1.00 140 120 1.00 0.00 0.40 0.20 0 Demand MR 160 240 320 400 400 500 QUANTITY (Cans of beer) MC ATC When they act as a profit-maximizing cartel, each company will produce information, each firm earns a daily profit of 3 Monopoly Outcome cans and charges so the daily total industry profit in the bear market is per can. Given this 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 while McCovey's profis is now per can. Mays's profit is now when . Therefore, you can conclude that total industry profit
2. Deviating from the collusive outcome Mays and McCovey are bear-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. Ⓡ PRICE (Dollars per can) 200 1.00 140 120 1.00 0.00 0.40 0.20 0 Demand MR 160 240 320 400 400 500 QUANTITY (Cans of beer) MC ATC When they act as a profit-maximizing cartel, each company will produce information, each firm earns a daily profit of 3 Monopoly Outcome cans and charges so the daily total industry profit in the bear market is per can. Given this 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 while McCovey's profis is now per can. Mays's profit is now when . Therefore, you can conclude that total industry profit
Chapter1: Making Economics Decisions
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Transcribed Image Text:2. Deviating from the collusive outcome
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.
PRICE (Dollars per can)
2.00
1.80
1.00
140
1.20
1.00
0.80
0.00
0.40
0.20
0
0
Demand
MR
160 240 320 400 480 560
QUANTITY (Cans of beer)
640
MC ATC
800
When they act as a profit-maximizing cartel, each company will produce
information, each firm earns a daily profit of S
Monopoly Outcome
cans and charge
so the daily total industry profit in the beer market is
per can. Given this
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
while McCovey's profit is now S
S
Mays increases its output beyond the collusive quantity.
per can. Mays's profit is now
when
to s
. Therefore, you can conclude that total industry profit
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