Mays and McCovcy arc beer-brewing companies that operate m a duopoly (two-firm o
ID: 1194948 • Letter: M
Question
Mays and McCovcy arc beer-brewing companies that operate m 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. Place the black point (plus symbol) on the following graph to indicate indicate the profitmaximizing price and combined quantity of output if Hays and McCovcy 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 while McCovey's profit is now Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity..Explanation / Answer
It has been provided that beer-brewing market at present is in duopolistic framework. This means it contains only two firms – Mays and McCovey.
If these two firms form a cartel then they will transform into monopolist.
A monopolist maximizes profit by producing that level of output at which marginal cost equals marginal revenue.
As given figure shows, marginal cost intersects or equals marginal revenue when 60,000 cans of beer are produced.
Price corresponding to 60,000 cans of beer (as per demand curve) is $0.80 per can.
So, profit maximizing price per can is $0.80.
It has been provided that both firms divide the cartel evenly. This means each of them will produce half the profit-maximizing output.
So, Mays and McCovey will each produce 30,000 cans of beer.
Thus, when both producer acts as profit-maximizing cartel, each company will produce 30,000 cans and charge $0.80 per can.
Calculate profit of Mays –
ATC = $0.60 per can
Output produced = 30,000 cans
Total cost = ATC * Output = $0.60 * 30,000 = $18,000
Price = $0.80 per can
Total revenue = Price * Output = $0.80 * 30,000 = $24,000
Profit = Total revenue – Total cost = $24,000 - $18,000 = $6,000
So, profit of Mays is $6,000.
Calculate profit of McCovey –
ATC = $0.60 per can
Output produced = 30,000 cans
Total cost = ATC * Output = $0.60 * 30,000 = $18,000
Price = $0.80 per can
Total revenue = Price * Output = $0.80 * 30,000 = $24,000
Profit = Total revenue – Total cost = $24,000 - $18,000 = $6,000
So, profit of McCovey is $6,000.
Thus, each firm earns a daily profit of $6,000.
Calculate daily total industry profit –
Daily total industry profit = daily profit of Mays + daily profit of McCovey
= $6,000 + $6,000
= $12,000
Thus, the daily total industry profit is $12,000.
At present both producers are producing 30,000 cans of beer daily.
Now, Mays decide to break collusion and increase its output by 50%.
This means Mays will increase its production by 15,000 cans of beer daily.
So, now Mays will produce a total output of 45,000 cans of beer daily.
McCovey keeps its production at the collusive agreement level that is 30,000 cans of beer daily.
So, daily total industry production will now become 75,000 cans of beer.
As given figure show that 75,000 cans of beer are demanded at $0.75 per can.
Thus, Mays deviation from the collusive agreement causes the price of a can of beer to decrease to $0.75 per can.
Calculate profit of Mays –
ATC = $0.60 per can
Output produced = 45,000 cans
Total cost = ATC * Output = $0.60 * 45,000 = $27,000
Price = $0.75 per can
Total revenue = Price * Output = $0.75 * 45,000 = $33.750
Profit = Total revenue – Total cost = $33,750 - $27,000 = $6,750
So, Mays’s profit is now $6750.
Calculate profit of McCovey –
ATC = $0.60 per can
Output produced = 30,000 cans
Total cost = ATC * Output = $0.60 * 30,000 = $18,000
Price = $0.75 per can
Total revenue = Price * Output = $0.75 * 30,000 = $22,500
Profit = Total revenue – Total cost = $22,500 - $18,000 = $4,500
So, McCovey’s profit is now $4,500.
Calculate daily total industry profit –
Daily total industry profit = daily profit of Mays + daily profit of McCovey
= $6,750 + $4,500
= $11,250
Thus, the daily total industry profit now is $11,250.
So, it can be concluded that total industry profit decreases when Mays increases its output beyond the collusive quantity.