Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm
ID: 1217182 • 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 $0.40 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 0.90 0.80Demand Monopoly Outcome 0.70 0.60 0.50 u 0.40 0.30 0.20 0.10 MC = ATC l MR 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Thousands of cans of beer)Explanation / Answer
Ans: As profit maximising cartel, each company will produce 160 cans and charge $0.80, each firm earns a daily profit of $64,000(160,000units*0.40price per unit), so the daily total industry profit in the beer market is $128,000.
Now Mays decides to raise its quantity by 50%, its price will also fall by 50%. New price will be $0.60(0.40 (MC) + half of 0.40 which was profit per unit earlier).