You are the manager of a firm that competes against four other firms by bidding

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.

Would you support or oppose this legislation?

What would have changed if there were only 2 firms; you and your competitor?

This is a managerial economics class please answer asap.

Explanation / Answer

Ans.I would support this legislation. Without this deal, the firms will compete for the contract to give a zero profit condition, like in a perfect competition. No matter how low another firm bids, I can always bid a little lower, to try to win the contract until P=MC. The rational outcome of this "game" is a contract that gives zero profit. The proposed legislation is like a collusive agreement guaranteeing each firm positive profit.
At the proposed contract, we will produce q=.2(270)=54 If 270 units are produced in the industry, and we charge $60/unit, we get Profit=q(MR-MC)=54(10)=$540. (assuming no fixed costs, as long as fixed cost<540 we want this contract)

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