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 is $0.40 per can. Assume that neither firm had any startup costs. That is, 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, because nothing in the model requires that the two companies must equally share the output.) Place the black point (X symbol) on the graph that follows to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together. Drop lines will extend to both axes automatically.

 When they act as a profit-maximizing cartel, each company will produce _______  cans per day and charge _______  per can. Given this information, each firm earns a daily profit of _______  , so the total industry profit in the beer market is _______  per day.

 Oligopolists often behave uncooperatively 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 agree to produce the same quantity. Consider the profit-maximizing level of output for each firm. Now, suppose that Mays decides to break the collusion and increase its output by 50% of Mays' portion of the collusive output, whereas McCovey continues to produce the same amount as in 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 _______  per day, whereas McCovey's profit is now _______  per day.

 Therefore, you can conclude that total industry profit _______  when Mays increases its output beyond the collusive quantity.

Answer 1

Blank 1: 160000

Blank 2: 1.2

Blank 3: 128000 (160000*(1.2-0.4))

Blank 4: 256000

blank 5: Decrease

blank 6: 1.0

Blank 7: 144000 (160000*1.5*(1.0-0.4))

Blank 8: 96000 (160000*(1.0-0.4))

Blank 9: Decreases