2. Deviating from the collusive outcome Mays and McCovey are beer-brewing compan
ID: 1194211 • Letter: 2
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 $0.40 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 1.00 0.90 Monopoly Outcome 0.80Demand 0.70 0.60 0.50 u 0.40 a 0.30 0.20 0.10 Cr MR 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Thousands of cans of beer)Explanation / Answer
Answer to 1st Blank: 40,000 cans (50% total prduction of 80,000)
Answer to 2nd Blank: $0.60 per can (as depicted in diagram)
Answer to 3rd Blank: $8,000 (profit of 0.20 per can x 40,000)
Answer to 4th Blank: $16,000 (one firm earns profit of 8000, so two firm earns profit of 2 x 8000)
Answer to 5th Blank: Decrease (as depicted in diagram. total production now is 60,000 + 40,000 = 1,000,00)
Answer to 6th Blank: $0.55 per can (as depicted in diagram)
Answer to 7th Blank: $9000 (profit of 0.15 per can x 60,000)
Answer to 8th Blank: $6000 (profit of 0.15 per can x 40,000)
Answer to 9th Blank: Decrease ( Now total profit is $15,000. Earlier it was $16,000)
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