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ECON C170, Summer 2014
Home Grades Personalized Reviews Discussion Course Materials
Oligopoly (Mobile-Enabled)
Graded Assignment | Read Chapter 17 | Back to Assignment Due Sunday 08.10.14 at 11:00 PM
2.Deviatingfromthecollusiveoutcome
MaysandMcCoveyarebeerbrewingcompaniesthatoperateinaduopoly(twofirmoligopoly).Thedailymarginalcost(MC)ofproducingacanofbeeris
constantandequals$0.20percan.Assumethatneitherfirmhadanystartupcosts,somarginalcostequalsaveragetotalcost(ATC)foreachfirm.
SupposethatMaysandMcCoveyformacartel,andthefirmsdividetheoutputevenly.(Note:Thisisonlyforconveniencenothinginthismodel
requiresthatthetwocompaniesmustequallysharetheoutput.)
Placetheblackpoint(plussymbol)onthefollowinggraphtoindicatetheprofitmaximizingpriceandcombinedquantityofoutputifMaysandMcCovey
choosetoworktogether.
Explanation:
Acartelactingasamonopolistwillproduceanoutputlevelatwhichmarginalrevenueequalsmarginalcost.Unlikeafirminacompetitivemarket,
however,amonopolisticcartelcanchargeapricethatisabovemarginalcost,namely,thepricecorrespondingtothedemandcurveatthis
quantity.Thisoccursataquantityof160,000cansandapriceof$0.60percan.
Whentheyactasaprofitmaximizingcartel,eachcompanywillproduce cansandcharge percan.Giventhis
information,eachfirmearnsadailyprofitof ,sothedailytotalindustryprofitinthebeermarketis .
Explanation:
YourAnswer
MonopolyOutcome
0 40 80 120 160 200 240 280 320 360 400
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0
P
R
I
C
E

(
D
o
l
l
a
r
s

p
e
r

c
a
n
)
QUANTITY(Thousandsofcansofbeer)
Demand
MR
MC=ATC
CorrectAnswer
80,000 $0.60
$48,000.00 $96,000.00
$64,000.00
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Whenthecompaniesoperateunderacartel,theywillactlikeamonopolistandproduceatotalof160,000cansbecausethisiswheremarginal
revenueequalsmarginalcost.Ifthecompaniesequallysplitproduction,theyproduce80,000canseachatthemonopolist'spriceof$0.60per
can,earningthemaprofitof$32,000.00each:




Eachfirmmakesthesameprofit,sothetotalindustryprofitis .
Oligopolistsoftenbehavenoncooperativelyandactintheirownselfinteresteventhoughthisdecreasestotalprofitinthemarket.Again,assumethe
twocompaniesformacartelanddecidetoworktogether.Bothfirmsinitiallyagreetoproducehalfthequantitythatmaximizestotalindustryprofit.
Now,supposethatMaysdecidestobreakthecollusionandincreaseitsoutputby50%,whileMcCoveycontinuestoproducetheamountsetunderthe
collusiveagreement.
Mayssdeviationfromthecollusiveagreementcausesthepriceofacanofbeerto decrease to percan.Mays'sprofitisnow
,whileMcCoveysprofitisnow .Therefore,youcanconcludethattotalindustryprofit
decreases whenMaysincreasesitsoutputbeyondthecollusivequantity.
Explanation:
Whenthecompaniesactcollusively,theprofitmaximizingoutputis80,000cansofbeerforeachcompany.SinceMaysincreasesitsoutputby
50%,itnowproduces cansofbeer.McCovey'soutputremainsat80,000cans,so
totaloutputbecomes cans.Accordingtothedemandcurve,thehighestpricethatcanbechargedataquantityof
200,000cansfallsto$0.50percan.
Thefirmswillnowmakeadifferentprofit,sincetheyareproducingatdifferentquantities:








YoucanseethatMayssbreakingoftheagreementincreaseditsprofitfrom$32,000.00to$36,000.00anddecreasedMcCovey'sprofitfrom
$0.50
$60,000.00 $40,000.00
$36,000.00
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$32,000.00to$24,000.00.Therefore,totalprofitequals .However,whenbothfirmsactcooperatively,
totalprofitis$64,000.00,sototalprofitinthemarketdecreasesby .
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