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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 competitors is Airbus, a French company jointly owned by Eads (80 percent) and BAE systems (20percent). Airbus was established in 1970 as a European consortium of French, German, and later Spanish and U.K. companies. In 2001, 30 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 Embraer, a Brazilian aircraft manufacturer. Embracer 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, Embraer makes aircraft the offer excellent reliability and cost-effectiveness.

To illustrate the price leadership concept, assume that total and marginal cost functions for Airbus (A) and Embraer(e) aircraft are as follows:

TCA = $10,000,000 + $35,000,000QA +$250,000QA2
MXA = $35,000,000+ $5000,000QA
TCE = $2000,000,000 + $20,000,000QE + $5000,000QE2
MCE= $20,000,000 + $1,000,000QE

Boeing's total and marginal cost relations are as follows:

TCB = $4,000,000,000 + $5,000,000QB = $62,500QB2
MCB = ΔTCB/ΔQB= $5,000,000 +$125,000QB

The industry demand curve for this type of jet aircraft is

Q = 910- 0.000017P

Assume throughout this problem that the Airbus and Embraer aircraft are perfect substitutes for Boeing Model 737-600, and that each total cost function includes a risk-adjusted normal rate of return on investment.

A. Determine the supply curves for Airbus and Embraer aircraft, assuming that the firms operate as price takers.
B. What is the demand curve faced by Boeing?
C. Calculate Boeings profit-maximizing price and output levels (Hint: Boeing's total and marginal revenue relations are TRB= $50,000,000QB - $50,000QB2, and MRB= ΔTRB/ΔQB = $50,000,000 - $100,000QB.)
D. Calculate profit-maximizing output levels for the Airbus and Embraer aircraft.
E. Is the market for aircraft from these three firms in short-run and in log-run equilibrium?

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Solution Preview

Please see the attached file.

A. Determine the supply curves for Airbus and Embraer aircraft, assuming that the firms operate as price takers.
Solution:
In perfect competition, the firm's supply curve is similar to its MC curve.
For Airbus the supply curve is equal to MXA = $35,000,000+ $5000,000QA
For Embracer the supply curve is equal to MCE= $20,000,000 + $1,000,000QE
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B. What is the demand curve faced by Boeing?
Solution:

Given,
TRB= ($50,000,000QB - $50,000QB^2)
The average revenue curve is nothing but the demand curve.
ARB=($50,000,000QB - $50,000QB^2)/QB
=$50,000,000 - $50,000QB
So the demand curve faced by the Boeing is $50,000,000 - $50,000QB.

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C. Calculate Boeings profit-maximizing price and output levels (Hint: Boeing's total and marginal revenue relations are TRB= $50,000,000QB - $50,000QB2, and MRB= ΔTRB/ΔQB = $50,000,000 - $100,000QB.)
Solution:
Boeing's profit will be maximized where MRB=MCB
MRB ...

Solution Summary

Please examine the supply and demand curves.

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A. What is the own price elasticity of demand when Px = $154? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $154?

B. What is the own price elasticity of demand when Px = $354? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price above $354?

C. What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are goods X and Z substitutes or complements?

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C. Advertising decreases by 2 percent.

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5. This year was prosperous for Starbucks Coffee. Revenues increased 9 percent. Suppose management attributes this revenue growth to a 5 percent increase in the quantity of coffee sold. If Starbucks' marketing department estimates the income elasticity of demand for its coffee to be 1.75, how will looming fears of a recession (expected to decrease consumers' incomes by 4 percent) impact the quantity of coffee ]Starbucks expects to sell?

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