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 ea 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. 1.00 Demand 0.90 Monopoly Outcome 0.80 0.70 MC = ATC 0.60 0.50 + 0.40 0.30 0.20 0.10 PRICE (Dollars per can)

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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.
1.00
Demand
0.90
Monopoly Outcome
0.80
0.70
MC = ATC
0.60
0.50 +
0.40
0.30
0.20 +
0.10
MR
100
200
300
400
500
600
700
800
900
1000
QUANTITY (Cans of beer)
PRICE (Dollars per can)
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 $0.60 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. 1.00 Demand 0.90 Monopoly Outcome 0.80 0.70 MC = ATC 0.60 0.50 + 0.40 0.30 0.20 + 0.10 MR 100 200 300 400 500 600 700 800 900 1000 QUANTITY (Cans of beer) PRICE (Dollars per can)
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 $
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 $
to
per can. Mays's profit is now
Therefore, you can conclude that total industry profit
when
Mays increases its output beyond the collusive quantity.
Transcribed Image Text: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 $ 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 $ to per can. Mays's profit is now Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity.
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