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 companie s must equally share the output.) Place the black point (plus symbol) on the foilowing 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 1.60Demand 1.40 1.20 1.00 0.80 0.60 MC = ATC 0.40 0.20 MR 0 25 50 75 100 125 150 175 200 225 250 QUANTITY (Thousands of cans of beer)

Explanation / Answer

Output will be where MR=MC; i.e. 50 units or 25 units for each firm. Draw a vertical line from 50 and see where it touches demand. Price will be 1.20.

Profit = PQ - Cost = 1.20*25 - 25*0.8 = 10. Total industry profit is 20.

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