Over the last century, The Boeing Co. has become the largest aerospace company in the world. Boeing's principal global competitor is Airbus, a company that has its roots in a European consortium of French, German and later, Spanish and U.K companies. Though dominated by Boeing and Airbus, smaller firms have recently entered the commercial aircraft industry. Notable among these is Embraer, a Brazilian aircraft ma nufacturer. Embraer makes smaller commercial aircraft that 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 :
TC A = $10,000,000 + $35,000,000Q A + $250,000QA^2
MC A = $35,000,000 + $500,000QA
TC E = $200,000,000 + $20,000,000Q E + $500,000Q E^2
MC E = $20,000,000 + $1,000,000Q E
Boeing's total and marginal cost relations are as follows: TC B = $4,000,000,000 + $5,000,000Q B + $62,500Q B 2
MC B = dTC B /d Q
B = $5,000,000 + $125,000Q B
The industry demand curve for this type of jet aircraft is Q = 910 - 0.000017P
For simplicity, assume that Airbus and Embraer aircraft are perfect substitutes for Boeing aircraft, 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 a s price takers.
b . What is the demand curve faced by Boeing?
c . Calculate Boeing's profit - maximizing price and output levels. (Hint: Boeing's total and marginal revenue relations are TR B = $50,000,000Q B - $50,000Q B 2 , and MR B =∂TR B /∂Q B = $50,000,000 - $100,000Q B .)
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 long - run equilibrium?