Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MCMC) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATCATC) 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. table 1 When they act as a profit-maximizing cartel, each company will produce $ cans and charge $per can. Given this information, each firm earns a daily profit 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. Mays’s deviation from the collusive agreement causes the price of a can of beer to (increase/decrease) to $__per can. Mays's profit is now $_ while McCovey’s profit is now $___. Therefore, you can conclude that total industry profit (increase/decrease) when Mays increases its output beyond the collusive quantity.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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Deviating from the collusive outcome

Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MCMC) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATCATC) 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.

table 1

When they act as a profit-maximizing cartel, each company will produce $____ cans and charge $______per can. Given this information, each firm earns a daily profit 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.

Mays’s deviation from the collusive agreement causes the price of a can of beer to (increase/decrease) to $______per can. Mays's profit is now $_____ while McCovey’s profit is now $_____. Therefore, you can conclude that total industry profit (increase/decrease) when Mays increases its output beyond the collusive quantity.

1.00
Demand
0.90
Monopoly Outoome
0.80
0.70
MC = ATC
0.60
0.50
0.40
0.30
0.20
0.10
MR
30
GO
90
120 150 180 210 240 270 300
QUANTITY (Thousands of cans of beer)
PRICE (Dollars per can)

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