Trailer Company has asked its financial planning committee to analyze short- and longer-run pricing and production levels for the new hawk II trailer. To facilitate the decision making process, the committee has been provided the following Demand and total cost functions by marketing and production departments:
P = 7000 - 5Q
TC = 225,000 + 1000Q + 10Q2
where, P = Price (in dollars)
Q = Quantity (units)
TC = Total Cost (in dollars)
A. What short-run price and output combination would be recommended if the committee decided that Skyhawk should take full advantage of its short-run monopoly position and maximize profits? What will profits be?
B. What longer-run price and output combination would result if Tomahawk II’s current brand loyalty and cost/output relationship can be maintained despite competitor offerings of several varieties of similar (not identical) trailers, but the firm cannot earn any economic profits? (Note: For simplicity, assume Tomahawk II sales decline because of a parallel leftward shift in the Demand curve while the cost/output relationship, which includes a normal profit, remains unchanged.)
C. What 1) longer-run price and 2) output combination would result if Skyhawk’s patent protection were to expire (and/or be circumvented) and competitors offered trailers identical to the Tomahawk II such that a perfectly competitive market existed? Again, assume that the current cost-output relationship can be maintained.