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24 February, 08:23

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 is Q = 800 - 10P and all five firms produce at a constant marginal cost of $50. 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 100 units at a contracted price of $70 per unit. Would you support or oppose this legislation? Explain.

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  1. 24 February, 11:26
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    Answer: $1,000

    Explanation:

    Given Data;

    Total government demand is Q = 800 - 10P

    marginal cost (Mc) = $50

    contracted price (cp) = $70 per unit

    Therefore;

    Marginal Revenue (MR) = Marginal Cost (MC)

    Q = 800 - 10P

    800 - Q = 10P

    Divide through by 10, where Q = 1

    800/10 - 1/10 = P

    80 - 0.1Q = P

    Total Revenue (TR) = PQ

    TR = 80 - 0.1Q

    MR = MC

    where MC = $50

    80 - 0.1Q = 50

    Collecting like terms

    80 - 50 = 0.1Q

    30 = 0.1 Q

    Divide both side by 0.1

    Q = 300

    Price would be

    P = 80 - 0.1Q

    P = 80 - 0.1 (300)

    P = $50

    MC = 40

    Producing Q units

    Total Cost (TC) = 40 * (300)

    = $12,000

    Total profit

    = TR - TC

    = (P * Q) - $12,000

    = ($50 * 300) - $12,000

    = $15,000 - $12,000

    = $3,000

    Changes caused by regulations

    Contracted price = $70

    Quantity = 100Units

    TT' = (P * Q) - TC

    = (70 * 100) - (50 * 100)

    = $7,000 - $5,000

    = $2,000

    TT - TT' = $ (3000 - 2000)

    = $1,000

    If legislation is passed all profit would reduce by $1,000
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