Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm
ID: 1121430 • 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 $1.20 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.
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.
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 ____ to___ per can. Mays's profit is now ___, while McCovey's profit is now ___. Therefore, you can conclude that total industry profit ____ when Mays increases its output beyond the collusive quantity.
2.00Demand 1.80 1.60 1.40 1.20 1.00 u 0.80 a 0.60 Monopoly Outcome MC = ATC 0.40 0.20 MR 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Cans of beer)Explanation / Answer
1.
Profit maximizing cartel produces at the point MR = MC
This occurs at P* = $1.6 ; Industry Q* = 80
Each firm's Q = 80/2 = 40
Each firm's P = $1.6
Profit = (1.6-1.2)40 = $16
Industry profit = (1.6-1.2)80 = $32
2.
New output = 40 + 40(1+50%) = 100 cans
New P = Falls to $1.5
May's profit = (1.5-1.2)60 = $18
McCovey profit = (1.5-1.2)40 = $12
Industry profit falls to $18+$12 = $30