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 $0.60 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) 1.00 Demand 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 MR MC = ATC 0 0 100 200 300 400 500 600 700 800 900 1000 QUANTITY (Cans of beer) Monopoly Outcome When they act as a profit-maximizing cartel, each company will produce charge $ 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 $ Oligopolists often behave non cooperatively 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 $ $ Therefore, you can conclude that total industry profit increases its output beyond the collusive quantity. while McCovey's profit is now to when Mays
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 $0.60 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) 1.00 Demand 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 MR MC = ATC 0 0 100 200 300 400 500 600 700 800 900 1000 QUANTITY (Cans of beer) Monopoly Outcome When they act as a profit-maximizing cartel, each company will produce charge $ 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 $ Oligopolists often behave non cooperatively 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 $ $ Therefore, you can conclude that total industry profit increases its output beyond the collusive quantity. while McCovey's profit is now to when Mays
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 $0.60 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)
1.00 Demand
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
MR
MC = ATC
0
0 100 200 300 400 500 600 700 800 900 1000
QUANTITY (Cans of beer)
Monopoly Outcome
When they act as a profit-maximizing cartel, each company will produce
charge
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
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 $
Therefore, you can conclude that total industry profit
increases its output beyond the collusive quantity.
I
to
while McCovey's profit is now
when Mays
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