Question

Deviating from the collusive outcome 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.)
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.

Monopoly Outcome PRICE (Dollars per can)QUANTITY (Thousands of cans of beer)DemandMRMC = ATC

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.

Maysâs deviation from the collusive agreement causes the price of a can of beer to toper can. Mays's profit is now, while McCoveyâs profit is now. Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity.

Answer 1

Total industry profits have decreased when May increased output beyond collusive quantity.

Explanation:

1) The profit is maximised when Marginal Revenue = Marginal Cost. This is where extra revenue from producing one more unit of good equals extra cost from producing that good.

Equilibrium point is marked by a cross and equilibrium price and quantity is underlined.

2) We see that the equilibrium quantity is 360 and price is 0.60. Because these two firms have identical costs, they will produce equal amounts of goods. Therefore each of them will produce 180 cans and charge 0.60 for them. Each firm earns a daily profit of:

Total revenue minus total cost

=Price into Quantity minus Total cost

=180 into 0.6 minus 0.2 into 80

=180 ( 0.6 minus 0.2)

=180 inot 0.4 = 72

Therefore each firm earns $72 and total industry profit is 72 into 2 = $144.

3) Now May decides to break the collusion and produce 50% more output. So orginally May was producing 180 units of good.

50% of 180 units is: (0.5) inot 180

=90

Therefore total units May is now producing is 50% more than 180, which is:

=180 plus 90

=270 units.

McCovey is honoring the original agreement and is producing 180 units of good.

So total units of goods in the market is = units produced by May + Units produced by McCovey

= 270 plus 180

=450 units

From the above schedule or demand-supply diagram, we have to find out the corrosponding price to 450 units units of quantity.