how about the blank which i filled? Are those correct? Mays and McCovey are beer
ID: 1222235 • Letter: H
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how about the blank which i filled? Are those correct?
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 if Mays and McCovey choose to work together. 2.00 1.80 1.60 Demand 1.40 Monopoly Outcome 1.00 MC = ATC 0.80 0.60 0.40 0.20 MR 0 5 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of cans of beer) When they act as a profit-maximizing cartel, each company will produce 10 cans and charge $1.20 per can. Given this information, each firm earns a daily profit of $12.00, 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 per can. Mays's profit is now$ , while McCovey's profit is now Therefore, you can conclude that total industry profit when ays increases its output beyond the collusive quantityExplanation / Answer
If both firm acts as a cartel, they will produce 10 cans. Price will be $1.20 . You filled this correctly but profit will be $ 2 for each firm and total profit is $4 both firms divided output evenly so they will earn profit equally. they have same MC. Both firm will produce 5 unit each.
profit = (Equilibrium price-ATC)* Quantity
Industry Profit = (1.20 - 0.80)* 10 = $4
if Mays decided to break collusion and increases his output by 50% means
it will produce 5 + 2.5 (50% of old output) = 7.5 cans
this act of mays lead to price war. price will DECREASE. new price will be $1.10 and total industry output will be 12.5 cans. if McCovey countinuos to produce same output set under the collusive agreement.
Mays's profit is now = (1.10-0.80)* 7.5 = $2.25 before it was $2
Mays's profit have increased.
Now, McCovey's profit is (1.10-0.80)* 5 = $1.5
it is decreased.
Total industry profit when both firms were working as a cartel = $4
Industry profit when Mays have incersed their output by breaking the collusion. 2.25+ 1.5= $3.75
Industry profit have gone down. it is decreased.
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