Fixed costs of producing alluring are $250,000. Current variable costs per kilo are $5. The firm has determined that the variable cost per kilo could be reduced by $0. 50 if production volume could be increased by 10 percent (fixed costs would remain constant). The firm’s marketing department has estimated the arc elasticity of demand for alluring to be – 1. 5. (a) How much would Superior Metals have to reduce the price of alluring in order to achieve a 10 percent increase in the quantity sold? B) What would the firm’s (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut? Question 2 – Monopoly Car Island Gas (GIG) Company is the sole producer of natural gas in the remote island country of Car. The firm’s operations are regulated by the local Energy Commission. The demand function for gas in Car has been estimated as: P – 1 ,OOH-O. Q where Q is output (measured in units) and P is price (measured in dollars per unit).
Gig’s cost function is: ETC 300,000 + Q This total cost function does NOT include a “normal” return on the firm’s invested capital of $4 million. (a) In the absence of any government price regulation, determine Gig’s optimal (i) output level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base. B) The Energy Commission has ordered the firm to charge a price which will provide it with NO more than a 12 percent return on its total assets. Determine Gig’s (i) output level, (ii) selling price, and (iii) total profits under this constraint. Re Hint: The roots of the quadratic equation: Question 3 – Oligopoly Two companies (A and B) are duopolistic that produce identical products. Demand for the products is given by the following demand function: P = 10,000 CB where QUA and CB are the quantities sold by the respective firms and P is the selling price. Total cost functions for the two companies are: ETC = 500,000 + AQUA + 0. AQUA ETC = 200,000 + CHUBB + GOB Assume that the two firms act independently as in the Court model (that is, each firm assumes that the other firm’s output will not change).
Determine the long-run equilibrium output and selling price for each firm. Question 4 – Price Leadership – Monopolistic Competition and Oligopoly. Over the last century, The Boeing Co. Has grown from building planes in an old, red boathouse to become the largest aerospace company in the world. Boeing’s principal global competitor is Airbus, a French company jointly owned by Dads 80%) and BABE Systems (20%). Airbus was established in 1970 as a European consortium of French, German and later, Spanish and U.
K companies. In 2001, thirty years after its creation, Airbus became a single integrated company. Though dominated by Boeing and Airbus, smaller firms have recently entered the commercial aircraft industry. Notable among these is Embrace, a Brazilian aircraft manufacturer. Embrace has become one of the largest aircraft manufacturers in the world by focusing on specific market segments with high growth potential. As a niche manufacturer, Embrace makes aircraft that offer excellent reliability and cost effectiveness.