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.) When they act as a profit-maximizing cartel, each company will produce20 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 $------------.Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement.Mays's deviation from the collusive agreement causes the price of a can of beer to to$per can. Mays's profit is now$, while McCovey's profit is now$. Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity. When they act as a profit-maximizing cartel, each company will produceinformation, each firm ears a daily profit of 5cars and charge $so the daily total industry profit in the beer market is 5Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume thetwo 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 thecollusive agreement.Mays's deviation from the collusive agreement causes the price of a can of beer towhile McCovey's profit is now 5Mays increases its output beyond the collusive quantity.per can. Given thistoTherefore, you can conclude that total industry profitper can. Mays's profit is nowwhenA Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this moderequires 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 andMcCovey choose to work together.1.00PRICE (Dolars per can)0.000.50 Demand0.700.000.500:400.30020 +0/10oStMR40 30 100 120 140QUANTITY (Cans of beer)100MC = ATC100 200Monopoly Outcome?W

Graph Profit is maximized by equating MR with MC. Equilibrium price is $0.6 and quantity is 40.

Answered: Mays and McCovey are beer-brewing…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter15: Oligopoly And Strategic Behavior

Section: Chapter Questions

Problem 3P

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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.)

When they act as a profit-maximizing cartel, each company will produce

20 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 to

per can. Mays's profit is now

, while McCovey's profit is now

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

When they act as a profit-maximizing cartel, each company will produce
information, each firm ears a daily profit of 5
cars and charge $
so the daily total industry profit in the beer market is 5
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
while McCovey's profit is now 5
Mays increases its output beyond the collusive quantity.
per can. Given this
to
Therefore, you can conclude that total industry profit
per can. Mays's profit is now
when
A

Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this mode
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.
1.00
PRICE (Dolars per can)
0.00
0.50 Demand
0.70
0.00
0.50
0:40
0.30
020 +
0/10
o
St
MR
40 30 100 120 140
QUANTITY (Cans of beer)
100
MC = ATC
100 200
Monopoly Outcome
?
W

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