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# demand curve

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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 = &#916;TCB/&#916;QB= \$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= &#916;TRB/&#916;QB = \$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= &#916;TRB/&#916;QB = \$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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