Deviating from the collusive outcome Mays and McCovey are beer-brewing companies
ID: 2495792 • Letter: D
Question
Deviating from the collusive outcome 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. When they act as a profit-maximizing cartel, each company will produce cans and charge per can. Give this information, each firm earns a daily profits 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.Explanation / Answer
The profit maximizing point is where MC(orange) and MR intersects ,so for this point of quanity look in demand curve to find equilibruim price. At MR = MC , Q* = 40 , So now look in demand curve at q = 40 and find equilibrium price.
Q*= 40,
can charge P* = 0.60
each firm profit = 20*60 - 20*0.40 = 4
Total industry profit = 8
beer to FALL to $.50, and profit 0.10*60 = 6
mcCovey profit = 0.1*20 = 2
Increased
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