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) 200 1.80 1.60 Demand 1.40 1.20 1.00 0.80 0.60 0.40 0.20 MC-ATC MR 0 0 90 180 270 360 450 540 830 720 810 900 QUANTITY (Cans of beer) Monopoly Outcome When they act as a profit-maximizing cartel, each company will produce 80 cans and charge $1.20 per can. Given this information, each firm earns a daily profit of $32.00, so the daily total industry profit in the beer market is $64.00 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 decrease ▾ to[ now $36.00, while Schmidt's profit is now Stargell increases its output beyond the collusive quantity. $1.10 per can. Stargell's profit is $24.00. Therefore, you can conclude that total industry profit increases ▼when
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) 200 1.80 1.60 Demand 1.40 1.20 1.00 0.80 0.60 0.40 0.20 MC-ATC MR 0 0 90 180 270 360 450 540 830 720 810 900 QUANTITY (Cans of beer) Monopoly Outcome When they act as a profit-maximizing cartel, each company will produce 80 cans and charge $1.20 per can. Given this information, each firm earns a daily profit of $32.00, so the daily total industry profit in the beer market is $64.00 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 decrease ▾ to[ now $36.00, while Schmidt's profit is now Stargell increases its output beyond the collusive quantity. $1.10 per can. Stargell's profit is $24.00. Therefore, you can conclude that total industry profit increases ▼when
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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)
200
1.80
1.60
Demand
1.40
1.20
1.00
0.80
0.60
0.40
0.20
MC-ATC
MR
0
0
90 180
270 360 450 540 830 720 810
900
QUANTITY (Cans of beer)
+
Monopoly Outcome
When they act as a profit-maximizing cartel, each company will produce
80 cans and charge
$1.20 per can. Given this
information, each firm earns a daily profit of
$32.00, so the daily total industry profit in the beer market is
$64.00
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 decrease ▾ to[
now
$36.00, while Schmidt's profit is now
Stargell increases its output beyond the collusive quantity.
$1.10 per can. Stargell's profit is
$24.00. Therefore, you can conclude that total industry profit increases ▼when
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