You are the manager of a firm that competes against four other firms by bidding
ID: 1109233 • 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 = 1900 -10P and all five firms produce at a constant marginal cost of $120. 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 500 units at a contracted price of $140 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
Contract is for 500 units.
Scenario 1
Contract is provided for entire quantity.
So, contract is awarded to our firm for the supply of emtire 500 units.
Calculate the price at which 500 units will be demanded by government -
Q = 1,900 - 10P
500 = 1,900 - 10P
10P = 1,400
P = 140
Total revenue = P * Q = 140 * 500 = $70,000
Total cost = MC * Q = 120 * 500 = $60,000
Profit = TR - TC = $70,000 - $60,000 = $10,000
Thus, if entire contract is awarded to our firm, total profit earned would be $10,000.
Scenario 2
20% of the contract is awarded.
Units to be supplied = 20% of 500 = 0.20 * 500 = 100
Price = $140 per unit
Total revenue = P * Q = $140 * 100 = $14,000
Total cost = MC * Q = $120 * 100 = $12,000
Profit = TR - TC = $14,000 - $12,000 = $2,000
Thus, if 20% contract is awarded to our firm, total profit earned would be $2,000.
Calculate change (fall) in profit -
Change (fall) in profit = $10,000 - $2,000 = $8,000
So,
Instruction: If you expect profits to fall, enter a negative number. = -$8,000.
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