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 equals $1.20 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. Can not paste the graph

When they act as a profit-maximizing cartel, each company will producecans and chargeper 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 toper 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.

Answer 1

Solution:- Profit maximization occurs by producing that number of units of good where Marginal Cost (MC) = Marginal Revenue (MR).

At production level of 80 cans of beer, Marginal Cost (MC) = Marginal Revenue (MR) = $ 1.20 per can. Since there are two firms named as Mays and McCovey, accordingly, each firm will produce 40 (80 / 2) cans of beer.

Price to be charged be each firm (Mays and McCovey) = $ 1.60 Per Can of Beer.

Profit of each firm (Mays and McCovey) = (1.60 - 1.20) * 40 = $ 16 Per Can of Beer.

Total industry profit consisting of two firms (Mays and McCovey) = 16 * 2 = $ 32 Per Can of Beer.

Question b). Solution:-

Units to be produced by Mays firm now = 40 + 50 % of 40 = 40 + 20 = 60 Cans of Beer

Units to be produced by McCovey firm = 40 Cans of Beer. (Same as in earlier question a.)

Price to be charged by firm Mays = $ 1.40 Per Can of Beer (Price to be charged by firm Mays earlier $ 1.60 per can of beer decreased to $ 1.40 per can of beer now.)

Profit of firm Mays = (1.40 - 1.20) * 60 = $ 12 Per Can of Beer.

Profit of firm McCovey = (1.60 - 1.20) * 40 = $ 16 Per Can of Beer. (Same as in earlier question a.)

Total profits of industry now = $ 28 Per Can of Beer. (12 + 16)