Question

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output McCovey choose to work together. 2.00 T 1.80 1.60 Demand Monopoly Outcome 1.40 1.20 1.00 MC = ATC u 0.80 0.60 0.40 0.20 MR 0 20 40 60 80 100120 140 160 180 200 QUANTITY (Thousands of cans of beer)
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.)

Answer 1

Industry profit Profit of firm 1+Profit of firm 2 8000+8000 16,000 Therefore, when the firms act as a profit-maximizing cartel, each company will produce 20,000 cans and charge $1.20 per can. Given this information, each firm earns a daily profit of $8,000,so the daily total industry profit in the beer market is $16,000 Suppose that Mays break the collusion and increases its output by 50%. In this case, it will produce 50 100 Output produced by Mays 20,000+ 20,000x -30,000 If McCovey continue to produce 20,000 units of output, then the total output of the industry will be 30,000+20,000 - 50,000 units Demand MC ATC 0.80 MR 40 50 Quantity The increase in the total output to 50,000 units of output will lead to an increase in the supply of the good and thus, in the fall of price to $1.10 per unit of output. In such a case, the profit of Mays will be