You are the manager of a firm that competes against four other firms by bidding
ID: 1107722 • Letter: Y
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= 750-8P and all five firms produce at a constant marginal cost of $50. 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 270 units at a contracted price of $60 per unit. If this legislation is passed, by how much should you expect your profits to change? Instruction: If you expect profits to fall, enter a negative () number.Explanation / Answer
1.
Before the legislation:
Q = 750 – 8P
8P = 750 – Q
P = 93.75 – 0.125Q
TR = P × Q = 93.75Q – 0.125Q^2
MR = Derivative of TR with respect to Q
= 93.75 – 0.25Q
The equilibrium condition is (MR = MC)
93.75 – 0.25Q = 50
0.25Q = 43.75
Q = 175
Now by putting the value of Q in the price function,
P = 93.75 – 0.125Q
= 93.75 – 0.125 × 175
= 93.75 – 21.875
= 71.875
Profit = TR – TC
= (175 × 71.875) – (175 × 50)
= 12,578.125 – 8,750
= 3,828.125
After the legislation:
TR = Units × Price = 270 × $60 = 16,200
TC = Units × MC = 270 × $50 = 13,500
Profit = TR – TC = 16,200 – 13,500 = 2,700
Change in profit = Before the legislation – After the legislation
= 3,828.125 – 2,700
= $1,128.125 (Answer)
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