2. Deviating from the collusive outcome Mays and McCovey are beer-brewing compan

Question

2. 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. 2.00 1.80 Monopoly Outcome 1.60 Demand 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0: MR 0 90 180 270 360 450 540 630 720 810 900 QUANTITY (Cans of beer)

Explanation / Answer

1. Equilibrium quantity = 180 cans of beer

2. $ 1.20

3. Total industry profit = 180 x (1.20 - 0.80) = 180 x 0.40 = $ 72

Each firms profit = 72/2 = $ 36

4. Total industry profit = $ 72

5. Inital quantity produced by both firms = 180 units

Implies 90 units by each firm

When Mays decide to produce 50% more i.e. 90 + 45 = 135 units produced by Mays and 90 units by McCovey.

Price of can of beer decreases to $ 1.10

6. Mays profit = (1.10 - 0.80) x 135 = $ 40.5

7. McCovey profit = (1.10 - 0.80) x 90 = $ 27

8. Total profit = 40.5 + 27 = $ 67.50

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