Attempts I I Average .F 3 2. Deviating from the collusive outcome Stargell and Schmidt are brewing companies that operate in a duopoly (two-rm 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 (ATE) for each rm. Suppose that Stargell and Schmidt form a cartel, and the rms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Piace the brad: point (plus symbol) on the following graph to indicate the prot-maximizing price and combined quantity of output if Star-gel! and Schmidt choose to work together. ('3) 2.0a 1.3:: - ' Monopoly Outcome 1.6EI 1.4a 1.2EI LOCI MC = ATC ELBEI PRICE (Dollars percan) use EL-iEl ELZEI MR El 9-0 mo 2?!) 350 450 5-10 630 720 310 9:10 QUANTITY {Cans of beer) When they act as a prot-maximizing cartel, each company will produce |:|cans and charge per can. Given this information, each rm earns a daily prot 0 , so the daily total industry profit in the beer market is . Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry prot. Now, suppose that Stargell decides to break the collusion and increase its output by 50%, while Schmidt continues to produce the amount set under the collusive agreement. Stargell's deviation from the collusive agreement causes the price of a can of beer to V to per can. Stargell's prot is now , while Schmidt's profit is now . Therefore, you can conclude that total industry profit v when Stargell increases its output beyond the collusive quantity. Grade It Now Save & Continue Continue without saving