z. Deviating trom the collusive outcome are beer-brewing companies that operate
ID: 1119014 • Letter: Z
Question
z. Deviating trom the collusive outcome are beer-brewing companies that operate in a duopoly (wo-frm ollgopoly). The daly marginal cost (MQ) of producing a can of beer is constant and equals s0.-40 per can. Assume that nether 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 McCovey choose to work together. 1.00 0.90 070 0.60 0.50 0.40 a. 0.30 0 20 0.10 MR 0 20 40 60 80 100 120 140 160 180 200Explanation / Answer
The outcome of the cartel is 40 units which means each firm will produce 20 units if they act as a monopoly. They charge a price of 60 cent and therefore they are able to earn 20 cents on each unit sold. For each firm a total profit is therefore $4 and total profit of the industry is $8
Because each firm was producing 20 units, Now one firm decides to increase is output by 50% which means it will now produce 30 units. This increases the market quantity from 40 to 50. This will increase the quantity produced in the market to 50 units and the price will fall to 55 cent.
In this case profit earned by Mays = (0.55 - 0.40)*30 = $4.5 and the profit earned by McCovey is 0.5*(0.55 - 0.40)*20 = $3. Indsutry profits have fallen as a result.
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