Aplia Homework: Monopolistic Competition, Oligopoly, and Game Theory Due Today a

Question

Aplia Homework: Monopolistic Competition, Oligopoly, and Game Theory Due Today at 11:59 PM EST 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 2.00Demand 1.80 1.60 1.40 1.20 1.00 Monopoly Outcome MC ATC u 0.80 0.60 0.40 0.20 MR

Explanation / Answer

When they act as a profit-maximizing cartel, each company will produce 20,000 cans and charge $1.60 per can. Given this information, each firm earns a daily profit of $8000 , so the daily total industry profit in the beer market is $16000.

( When these two firms form a cartel they transform into a monopoly. So maximum prfot is achieved when MR=MC.At this the corresponding output is 40000 cans but since the firms have evenly distributed the output each firm produces 20000 cans and the corresponding price is $1.60.

Profit = TR - (Output * Total cost )

= (1.60*20000)- (20000*1.20)

= $8000

Total profit = 8000*2 = $16000 )

Mays’s deviation from the collusive agreement causes the price of a can of beer to decrease to $1.3 per can. Mays's $15000 profit is now, while McCovey’s profit is $10000 now. Therefore, you can conclude that total industry profit $25000 when Mays increases its output beyond the collusive quantity.

( Mays's production now - 20000+10000 = 30000

At 30000 units of production the price now is $1.3 hence price decreases.

May's profit = TR - (Output * Total cost )

= (30000*1.3) - ( 30000*0.8) = 15000

McCovey's profit = TR - (Output * Total cost )

= (20000*1.3) - ( 20000*0.8) = 10000

Total profit = 25000 )

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