Question

Industry Analysis Scenario In the island nation of Autarka, the government holds a monopoly over the provision of airfreight services. Both the general public and business groups regularly complain about high prices and poor quality of service from the government owned monopoly, Autarka Airfreight Services (AAS). In response to these complaints, the national government commissioned the competi- tion authority to recommend steps for improving the efficiency of the airfreight market. The commission made two recommendations: The airfreight services market should be opened up to competition from privately owned firms. Each firm operating in the airfreight market, including AAS, should be required to pay an annual lump-sum licence fee to the government. The competition authority expects that the reforms will lead to a lower cost, higher qual- ity service.

The national government of Autarka has pledged to implement all of the commission’s regulations. Industry structure The airfreight market is best modelled as Cournot competition. This is because compet- ing firms must hire aircraft and establish distribution networks before offering airfreight services.

Demand for airfreight services is, P =42−0.2Q, where P represents the price of transporting a package, and Q is the total number of packages transported per year, measured in millions of packages. At present, AAS charges $30 a package and transports 60,000,000 packages per year. While the firm is inefficient, it manages to return an operating profit of $180,000,000 per year into government revenues. The competition authority expects that after implementing the market reforms, all firms in the market (includeing AAS) will be more efficient. Each firm in the market will be able to transport a package at a marginal cost of $6 per package, and face fixed costs of $100,000,000 per year.

Your Task The Minister for Transport has instructed you to recommend an appropriate licence fee for the airfreight market. The minister has three objectives:

1. Maximise government revenues from the licence fee;

2. Minimise the cost of airfreight services to consumers, and;

3. Increase the number of packages transported per year to at least 150,000,000. Note that competition policy prevents the government from imposing any other form of market regulation, including price controls or quotas. Required steps (The Question) When completing the industry analysis you should assume that firms are engaged in Cournot Competition.

Step 1: Using the information provided in the scenario, derive a total cost function for a typical firm. Use QA to indicate the number of packages transported by the firm (measured in millions of packages).

Step 2: Using the cost function from step 1, derive a profit function for the typical firm. Use X to represent the combined number of packages transported by all other firms (measured in millions of packages).

Step 3: Derive the typical firm’s best-response function.

Step 4: Find the equilibrium quantity of the typical firm as a function of the total number of firms competing in the market. Use N to represent the total number of firms competing in the market. Step 5: Find the equilibrium market quantity and market price as a function of N.

Step 6: Find the equilibrium producer surplus of the typical firm as a function of N.

Step 7: Complete any additional calculations that you require to support your recommen- dation.

Answer 1

Scenario

In the island country of Autarka, the administration holds a syndication over the arrangement of airship cargo administrations. Both the overall population and business bunches routinely whine about exorbitant costs and low quality of administration from the legislature possessed restraining infrastructure, Autarka Airfreight Services (AAS).

Because of these objections, the public government appointed the opposition power to suggest ventures for improving the productivity of the airfreight market. The commission made two proposals:

The airfreight administrations market ought to be opened up to rivalry from exclusive firms.

Each rm working in the airfreight market, including AAS, ought to be needed to pay a yearly single amount permit charge to the administration.

The opposition authority expects that the changes will prompt a lower cost, more excellent assistance. The public administration of Autarka has swore to execute the entirety of the commission's guidelines.

Industry structure

The airfreight market is best demonstrated as Cournot rivalry. This is on the grounds that contending firms must recruit airplane and build up dispersion networks before requesting airfreight administrations. Interest for airfreight administrations is,

P = 42 0:1Q;

where P speaks to the cost of shipping a bundle, and Q is the all out number of bundles moved every year, estimated in a great many bundles.

At present, AAS charges $30 a bundle and transports 120,000,000 bundles for each year. While the firm is episode, it figures out how to restore a working master t of $360,000,000 every year into government incomes.

The opposition authority expects that in the wake of actualizing the market changes, all organizations in the market (counting AAS) will be more productive. Each rm in the market will have the option to move a bundle at a negligible expense of $6 per bundle and face fixed expenses of $100,000,000 every year.

Task

The Minister for Transport has taught you to suggest a proper permit charge for the airfreight market. The pastor has three targets:

1.Augment government incomes from the permit charge;

2.Limit the expense of airfreight administrations to buyers, and;

3.Increment the quantity of bundles moved every year to at any rate 250,000,000.

Step 3.Firm 1's best response function gives, for each possible output of firm 2, the profit-maximizing output of firm 1. Firm 1's profit-maximizing output when firm 2's output is y₂ is the output y₁ that maximizes firm 1's profit; that is, the value of y₁ that maximizes

P(y₁ + y₂)y₁ TC₁(y₁).

Differentiating with respect to y₁ (treating y₂ as a constant), we conclude that the profit-maximizing output y₁ satisfies

P'(y₁ + y₂)y₁ + P(y₁ + y₂) MC₁(y₁) = 0.

We'd like to know the shape of firm 1's best response function---i.e. we'd like to know how the value of y₁ that satisfies this condition depends on y₂.

4.Calculate number of firms. Given the market quantity, and the individual firm's quantity produced we can calculate the number of firms: nq*=Q* Total output is Q*=10 000 and each firm produces q*=50 units, so there must be n=10 000 / 50=200 firms.

5.The harmony cost is the main cost where the plans of customers and the plans of makers concur—that is, the place the sum shoppers need to purchase of the item, amount requested, is equivalent to the sum makers need to sell, amount provided. This regular amount is known as the balance amount. At some other value, the amount requested doesn't rise to the amount provided, so the market isn't in balance at that cost.

The word balance implies balance. In the event that a market is at its harmony cost and amount, at that point it has no motivation to move away starting there. Nonetheless, in the event that a market isn't at balance, at that point financial weights emerge to push the market toward the balance cost and the harmony amount.

6. the producer surplus is the difference between the supply curve and the price received. ... Market equilibrium and consumer and producer surplus ... How do we calculate the producer surplus if it is a non-linear curve firm -economic-profit/average-costs-tutorial/v/fixed--variable--and-marginal-cost.

Market equilibrium and consumer and producer surplus ... In general, companies don't set out to find out the consumer surplus directly, they generally set out to find out what price they could charge for a particular.

7.In Q2, if we go 1 step ahead and try to find the voltage across bulb 2, we will find the voltage is = V = IR = 4 A x 8 Ohm = 32 V. Now as per bulb rating the maximum W it can have is 20 V but in this circuit it is going till 32 V, which means it will break at this value. So with a battery of 40V, this circuit will break as bulb 2 will not be able to hold 32 of W. Please evaluate this and advice if this is the correct observation.