Question

Exercise 8 Question Help Suppose the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have identical cost functions, C(q) = 50q. Assume that the demand curve for the industry is given by P = 190-Q and that each firm expects the other to behave as a Cournot competitor. Calculate the Cournot-Nash equilibrium for each firm, assuming that each chooses the output level that maximizes its profits when taking its rival's output as given. What are the profits of each firm? (Round all quantities and dollar amounts to two decimal places.) When competing, each firm will produce 46.67 units of output. In turn, each firm will earn profit of $ 2177.77 What would be the equilibrium quantity if Texas Air had constant marginal and average costs of $25 and American had constant marginal and average costs of $50? If Texas Air had constant marginal and average costs of $25 and American had constant marginal and average costs of $50, American would produce 38.33 units and Texas Air Corp. would produce 63.33 units. In turn, American's will earn profit of $ 1469.57 and Texas Air Corp. will earn profit of $ 4011.32 Assuming that both firms have the original cost function, C(q) = 50q, how much should Texas Air be willing to invest to lower its marginal cost from 50 to 25, assuming that American will not follow suit? Texas Air Corp. would be willing to invest $

Answer 1

P= 190-8, TT (P-MC)n= (190- 50-9-9)91 = (140-93) U-92 BR,: an > (140-V2) – 29, = o, MC=50, then BR be Simi lasly 42n 40 - •5%2 V2 BR= 4o -•5n 4= 40 - •5 (70- •5%) 4= 35+ •25h 1= 35X4 = -> •45%= 35 46.664 op = 46-67 P= 190 -Q = 9 6. 66 (96.GG - 50) (46•67) wnits Q = 4t92= 93.3 4 , ñi= Tg = 2147.62 Ans %3D then BR - (190-25)–-•5%2 MG=95, MC2= 50, %3D q BR= 82-5- •5%2 9,BR 40 - 591 4= 82.5 - 5( 40 - •59) •454= 4%5, A CAmenican) 40-59* = 38.33 then n*= 63.33, "Trexas) %3D %3D %3D

= 63-33 +38•33 = l01.66 . 88 34 Q = a+rz Now %3D P= 190-8 = ( 88.34 - 25) (63-33) 40 11. 32 (Texas) Tñe (Amenican) = (88.34 - 50) (38.33) = 1469. 54

• willingness to invest : increase in profit , when MC falls from. 50 to 25

= (4011.32 - 2177.62)

= $ 1833.7