Mays and McCoyey are heerhrewing cormania that operate in a duopoly {two-firm oligopoly]. The daily manginal cost {ML-II of producing a can of
beer is oonsiant and equals $0.40 per can. Assume that neither firm had any slartup vclostsr so marginal cost equals average toial cost {ATE} 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
mouires that the two companifi must equally share the output.) Place the black point {plus symbol) on the Following graph to indicate the pmfibnlaximizfng price and Worried quantity ofou'l'put iF Mays and
McCo‘vey choose to work togethec 1.00 [LSD Delrenzl SE55 F'RIGE (III ollara par can) [LED [LED [Lil] I} 21] 4|] III 301013120140150130200
QUANTI'I'YfI'houss-fisofcansofbeer} In'l'hen they act as a profit-maximizing cartelr each company will produce: cans and charge— per can. Given this
information. each firm earns a daily profit o'FE , so the daily total industry profit in the beer marloet ES . Oligopolisls oFben behaye noncoop-ercltiyely and act in their own selF-interat eyen though this decreases total profit in the marloet. Again, assume the
two oornpanis form a arbel and decide to work together. Eloth firms initially agme to produce half the quantity that maxirniza total industry profit.
Now, suppose that Mays ClECiElE to break: the collusion and increase its output by 50%, while McCoyey continua to produce the amount set under the collusive agreement. Mays's deviation from the oollusiye agreement ausa the price of a can of beer be 7 _ p-er can. Mays's pmfit is new
E .. while Mchrvey's profit is _ . Therefore. you can conclude that total industry profit 7 when Mays increasE its output beyond the collusive quantity.

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