Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm
ID: 1118906 • Letter: M
Question
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 $0.80 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 i Mays and McCovey choose to work together 2.00 1.80 1.60 Demand 1.40 1 20 .00 0.80 0.60 0.40 0 20 Monapoly Outcome MC ATC MR 70140 210 280 350 420 490 560 700 QUANTITY (Cans of beer) and charge s When they act as a profit-maximizing cartel, each company will Given this information, each firm earns a daily profit of s per can 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 halif 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. Using the demand curve shown, find the price associated with this new total level of combined output (the price at which this new level of output would be purchased by consumers). can of beer to tos Mays's deviation from the collusive agreement causes the price of profit is now profit per can. Mays's , while McCovey's profit is now s Therefore, you can conclude that total industry when Mays increases its output beyond the collusive quantity. Continue without savingExplanation / Answer
Answer to blank 1: 70
Answer to blank 2: $1.20
Answer to blank 3: $28 [i.e.($1.20 - $0.80) * 70 = $28]
Answer to blank 4: $56 (i.e. 28 * 2 = $56)
Answer to blank 5: decreases
Answer to blank 6: $1.10
Answer to blank 7: $31.50
Answer to blank 8: $21
Answer to blank 9: decreases
Explanation:
Now Maya's will produce 70 + 35 = 105 cans
Maya's profit = [(1.10 - 0.80) * 105] = $31.50
McCovey will produce 70 cans
McCovey's profit = [($1.10 - 0.80) * 70] = $21
Total industry profit = 31.50 + 21 = $52.50