Question

In: Economics

Over the past few decades, Boeing’s chief competitor was Airbus. Recently, smaller firms have entered the...

Over the past few decades, Boeing’s chief competitor was Airbus. Recently, smaller firms have entered the market. One of these firms is Embraer. Embraer recently had one of the best-selling business jets, the Phenom 300. Though, there are competitors, Boeing has led the market in terms of pricing.

1. What type of market structure is this and what model might we use to analyze it?

These companies have the following total cost functions with A = Airbus, E = Embraer and B = Boeing:

TCA= $1,500,000 + $30,000,000QA + $500,000QA2

TCE= $484,000,000 + $10,000,000QE + $250,000QE2

TCB= $3,000,000,000 + $2,000,000QB + $55,000QB2

The industry demand curve for this type of jet aircraft is:

Q = 950 - 0.000015P

2. What are the supply functions for Airbus and Embraer? (Hint: these firms operate as price takers)

3. What is Boeing’s demand function? (Hint: Boeing’s demand function is the industry demand curve minus the following firms’ supply or QB= Q – QA– QE. Use the answers you found in question 2)

4. What is Boeing’s profit-maximizing price and output.

5. What are Airbus’ and Embraer’s profit-maximizing output levels?

6. Is the industry in short-run equilibrium, i.e. does firm supply equal total demand?

7. Which firms are earning an economic profit? Which ones are earning a normal rate of return? How do you know?

8. Is the industry in a long-run equilibrium? Why or why not?

Solutions

Expert Solution

1. The market structure is oligopolistic as there are small number of companies controlling the market.

2. For profit maximisation, marginal revenue = marginal cost (MR = MC)

Since, these firms are price takers, marginal revenue = price.

Marginal cost (by definition) = change in total cost / change in quantity. See image below for calculation.

So, supply function for Airbus --> P = 30,000,000 + 1,000,000QA

supply function for Embraer --> P = 10,000,000 + 500,000QE

3. Boeing's demand function = industry demand function - Airbus and Embraer's supply function

QB = ( 950 - 0.000015P ) - (10^(-6)P - 30) - (2*10^(-6)P - 20)

QB = 950+30+20 - 15P-P-2P*10^(-6)

QB = 1000 - 0.000018P

4. For profit maximisation, marginal revenue = marginal cost (MR = MC)

See image below for profit maximising output:

Plugging in the value of QB

323 = 1000 - 0.000018P

P = 37.58 MM$

Rahul Sunny answered 13 hours ago
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