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 = 1300 -6P 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 400 units at a contracted price of $150 per unit. If this legislation is passed, by how much should you expect your profits to change?

Explanation / Answer

Till Legislation is not passed

Since each firm competes with other firms, so each will try to bid less than other , and thus finally equal to MC

So, profit of each firm = 0

If the legislation is passed

Q = 0.20*400 = 80 , P = 150

Total Revenue = 80*150 = $12,000

Total cost = 80*120 = $9,600

Profit = TR - TC = 12,000 - 9,600 = $2,400

So, Change in profit = $2400

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