Question

You are the manager of a firm that competes against four other firms by bidding for government contracts. While you believe your product is better than the competition, the government purchasing agent views the products as identical and purchases from the firm offering the best price. Total government demand is Q = 1200 -8P and all five firms produce at a constant marginal cost of $70. For security reasons, the government has imposed restrictions that permit a maximum of five firms to compete in this market; thus entry by new firms is prohibited. A member of Congress is concerned because no restrictions have been placed on the price that the government pays for this product. In response, she has proposed legislation that would award each existing firm 20 percent of a contract for 480 units at a contracted price of $90 per unit.

If this legislation is passed, by how much should you expect your profits to change?

Answer 1

Q = 1200 - 8P

Or on the other hand, P = 1200/8 - Q/8 - - (1)

Duplicate eq. 1 with Q gives complete income (TR)

TR = Q*P = 150Q – Q^2/8 - - (2)

Separation of eq. 2 w.r.t. Q will give negligible income (MR)

MR = 150 – 2Q/8

Or on the other hand

MR = 150-Q/4

To accomplish benefit amplification,

MR = MC

150-Q/4 = 70

Q = (150-70)*4 = 320

P = 150 – 320/8 = $110

Creation to be finished by every member firm = 320/5 = 64 units at a cost of $110

Hence, benefit earned by every member firm = 64*110 - 64*70 = $2560

However, all out request is distinguished as 480 units at a cost of $90.

In this way, portion of every contender firm = 480/5 = 96 units

Benefit earned by every member firm according to the enactment rule = 96*90 - 96*70 = $1920

Hence, Change in benefit because of enactment rule = 1920 – 2560 = - $640

In this way, there is a fall in benefit of 640 for every contender firm due to proposed rule of cost and amount.