(1) QD = 600 – 2p, where p is the price for one airplane in millions of dollars (from now on, we will just refer to “the price”).
(1) QD = 600 – 2p, where p is the price for one airplane in millions of dollars (from now on, we will just refer to “the price”). In equilibrium, the amount supplied equals the amount demanded, so QD=QA+QB, where QA is the amount supplied by Airbus and QB the amount supplied by Boeing. Questions a) Explain equation (1). Does it make sense? Remember, the marginal costs of an airplane have been estimated at MC=$150 for both companies. You will now determine the optimal quantity that Airbus supplies. The optimal quantity is the quantity that maximizes a company’s profits. Profits are determined by: Profits = Revenues – Total Costs, so for Airbus we have: Profits Airbus= pQA – MCQA. b) Suppose that Boeing supplies 80 airplanes. How much will Airbus supply? c) Suppose Airbus supplies 110 aircraft. How much will Boeing supply in response? You may have notice from answers b) and c) that the market is not in equilibrium for these amounts of production. To calculate the equilibrium amounts QA and QB, we need to calculate the so-called best response functions. d) Suppose Boeing supplies an amount QB. What will be Airbus’ total revenue function, for any supply of QA? 7 e) Using answer d), calculate Airbus’ marginal revenue function for any given amount QB supplied by Boeing. f) Determine for which amount QA the marginal revenue equals the marginal costs. g) Repeat f) for Boeing. h) Use your answers to f) and g) to calculate the equilibrium supply of QA and QB. What is the associated market price p?
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