Suppose Boeing faces the following demand curve for the monthly sales of its 787 aircraft:
Q  120  0.5P
Where Q is airplanes sold per month and P is the price in millions of dollars. The airplane uses a set of engines made by General Electric, and Boeing pays GE a price PE (in millions of dollars) for each set of engines. The marginal cost to GE of producing a set of engines is 20 (million dollars). In addition to paying for engines, Boeing incurs a marginal cost of 100 (million dollars) per plane.
a. What is Boeing’s profit-maximizing price of airplanes, given a price PE for the engines? What is the profit-maximizing price that GE will charge for each set of engines? Given that price of engines, what price will Boeing charge for its airplanes?
b. Suppose Boeing were to acquire GE’s engine division, so that now the engines and airplanes are made by a single company. Now what price will the company charge for its airplanes?