It's the year 2027, and Boeing is launching the B797 while Airbus is launching the A360....

 

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It's the year 2027, and Boeing is launching the B797 while Airbus is launching the A360. Assume that the firms don't sell other planes, and there are no other plane makers in the world. Airline companies view B797s and A360s as perfect substitutes, and the demand for these planes is: Q(P) = 5500-10P, where P is in millions of US dollars. Airbus and Boeing have the same cost function: C(q) = 40000 - 100q -0.05q2, where the cost is in millions of US dollars. Assume that the $40 billion constant in the cost function is the sunk cost of developing the aircraft, so it is borne even if q=0. 5. Let's first warm up by reviewing monopoly behavior. a) What price would Boeing charge if Airbus did not exist? b) What would Boeing's profit be if Airbus did not exist? c) Suppose Boeing and Airbus merge. What is the cost function of the combined company? Hint: The merged firm will assign part of the production to Boeing and part of it to Airbus in a way that minimizes cost. Since both Boeing and Airbus have increasing marginal cost, the merged firm will equalize marginal costs across Boeing and Airbus. (For more details, see the online document on the cost function of merged firms.) d) What is the profit of the merged company? It's the year 2027, and Boeing is launching the B797 while Airbus is launching the A360. Assume that the firms don't sell other planes, and there are no other plane makers in the world. Airline companies view B797s and A360s as perfect substitutes, and the demand for these planes is: Q(P) = 5500-10P, where P is in millions of US dollars. Airbus and Boeing have the same cost function: C(q) = 40000 - 100q -0.05q2, where the cost is in millions of US dollars. Assume that the $40 billion constant in the cost function is the sunk cost of developing the aircraft, so it is borne even if q=0. 5. Let's first warm up by reviewing monopoly behavior. a) What price would Boeing charge if Airbus did not exist? b) What would Boeing's profit be if Airbus did not exist? c) Suppose Boeing and Airbus merge. What is the cost function of the combined company? Hint: The merged firm will assign part of the production to Boeing and part of it to Airbus in a way that minimizes cost. Since both Boeing and Airbus have increasing marginal cost, the merged firm will equalize marginal costs across Boeing and Airbus. (For more details, see the online document on the cost function of merged firms.) d) What is the profit of the merged company?

Answer rating: 100% (QA)

a If Airbus did not exist Boeing would have a monopoly in the market and set its price to maximize its profit It would set its output level where marg... View the full answer