You are the manager of a firm that competes against four other firms

| November 24, 2016

1

You are the manager of a firm that competes against four other firms by bidding for government contracts. While you believe your product is better than the competition, the government purchasing agent views the products as identical and purchases from the firm offering the best price. Total government demand isQ= 1100 -5Pand all five firms produce at a constant marginal cost of $80. For security reasons, the government has imposed restrictions that permit a maximum of five firms to compete in this market; thus entry by new firms is prohibited. A member of Congress is concerned because no restrictions have been placed on the price that the government pays for this product. In response, she has proposed legislation that would award each existing firm 20 percent of a contract for 600 units at a contracted price of $100 per unit. If this legislation is passed, by how much should you expect your profits to change?

Instruction:If you expect profits to fall, enter a negative number.

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#2

PC Connection and CDW are two online retailers that compete in an Internet market for digital cameras. While the products they sell are similar, the firms attempt to differentiate themselves through their service policies. Over the last couple of months, PC Connection has matched CDW’s price cuts, but has not matched its price increases. Suppose that when PC Connection matches CDW’s price changes, the inverse demand curve for CDW’s cameras is given byP= 1,500 – 3Q.When it does not match price changes, CDW’s inverse demand curve isP= 1,200 -0.5Q.Based on this information, determine CDW’s inverse demand function over the last couple of months.

P =

Q if Q ≤ 120


Q if Q ≥ 120

Over what range will changes in marginal cost have no effect on CDW’s profit-maximizing level of output?

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