while you believe your product is better than the competition, the government pu

Question

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 = 1800 -8p and all five firms produce at a constant marginal cost of $110. 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 760 units at a contracted price of $130 per unit. if this legislation is passed, by how much should you expect your profits to change?

Explanation / Answer

At the equillibrium MC=P, Q= 1800-8P=1800-8*110=1800-880=920

Each firm gets =920/5=184

Total Value=184*110=20240

As per Govt contract total value of order=(760/5)*130=19760

Effect on profit =20240-19760=480

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