2. Deviating from the collusive outcome Stargell and Schmidt are 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 Stargell and Schmidt 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 Stargell and Schmidt choose to work together. PRICE (Dollars per ca 2.00 1.00 1.40 1.40 1.20 1.00 0.00 060 0.40 020 D . Demand MA 160 340 300 400 400 500 QUANTITY (Cans of beer) 40 MOATC 720 800 When they act as a profit-maximizing cartel, each company will produce information, each firm earns a daily profit of Monopoly Outcome cans and charges to the daily total industry profit in the beer market is per can. Given this
2. Deviating from the collusive outcome Stargell and Schmidt are 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 Stargell and Schmidt 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 Stargell and Schmidt choose to work together. PRICE (Dollars per ca 2.00 1.00 1.40 1.40 1.20 1.00 0.00 060 0.40 020 D . Demand MA 160 340 300 400 400 500 QUANTITY (Cans of beer) 40 MOATC 720 800 When they act as a profit-maximizing cartel, each company will produce information, each firm earns a daily profit of Monopoly Outcome cans and charges to the daily total industry profit in the beer market is per can. Given this
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter13: best-practice Tactics: Game Theory
Section: Chapter Questions
Problem 3E
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Transcribed Image Text:When they act as a profit-maximizing cartel, each company will produce
information, each firm earns a daily profit of s
cans and charges
, so the daily total industry profit in the beer market is s
per can. Given this i
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 Stargell decides to break the collusion and increase its output by 50%, while Schmidt continues to produce the amount set under
the collusive agreement.
Stargell's deviation from the collusive agreement causes the price of a can of beer to
while Schmidt's profit is now s
now I
Stargell increases its output beyond the collusive quantity.
to s
Therefore, you can conclude that total industry profit
per can. Stargell's profit is
when
Transcribed Image Text:2. Deviating from the collusive outcome
Stargell and Schmidt are 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 Stargell and Schmidt 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 Stargell and
Schmidt choose to work together.
PRICE (Dollars per can
2.00
1.00
1.00
1.40
1:20
1:00
0.40
050
0.40
020
D
Demand
MC = ATC
MR
1 BO 160 340 300 400 400 500 40 720 800
QUANTITY (Cans of beer)
When they act as a profit-maximizing cartel, each company will produce
information, each firm earns a daily profit of
Monopoly Outcome
cans and charges
so the daily total industry profit in the beer market is s
per can. Given this
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