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 $0.40 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 0.90 0.80 Demand 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0 0 20 20 MC = ATC MR 40 60 80 100 120 140 160 180 200 QUANTITY (Thousands of cans of beer) Monopoly Outcome ? When they act as a profit-maximizing cartel, each company will produce information, each firm earns a daily profit of $ so the daily total industry profit in the beer market is $ cans and charge $ 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 $ Mays increases its output beyond the collusive quantity. to $ per can. Mays's profit is now Therefore, you can conclude that total industry profit when
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 $0.40 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 0.90 0.80 Demand 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0 0 20 20 MC = ATC MR 40 60 80 100 120 140 160 180 200 QUANTITY (Thousands of cans of beer) Monopoly Outcome ? When they act as a profit-maximizing cartel, each company will produce information, each firm earns a daily profit of $ so the daily total industry profit in the beer market is $ cans and charge $ 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 $ Mays increases its output beyond the collusive quantity. to $ per can. Mays's profit is now Therefore, you can conclude that total industry profit when
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 $0.40 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
0.90
0.80
Demand
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0
0
20
20
MC = ATC
MR
40
60
80 100 120 140 160
180 200
QUANTITY (Thousands of cans of beer)
Monopoly Outcome
?
When they act as a profit-maximizing cartel, each company will produce
information, each firm earns a daily profit of $
so the daily total industry profit in the beer market is $
cans and charge $
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 $
Mays increases its output beyond the collusive quantity.
to $
per can. Mays's profit is now
Therefore, you can conclude that total industry profit
when
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