Determine the optimum prices and outputs, Risk Management

The basic question in this case is whether Jetliners and Acme Airline should work together to develop a new super sized airframe or should each company seek to develop its own version of the equipment. For the purposes of this analysis, you are to assume the Demand and AVC equations provided below are correct and reflect the additional analysis that representatives of the two companies were able to estimate within the context of the size of the market opportunity where Acme felt that the market would evolve toward more point to point flights diverting traffic form current mega-hub airports secondary airports. The industry could satisfy most of the demand and only 200 - 300 super sized planes would be needed over the next 20 years. Jetliners felt the demand for flights to and from major centers would continue to grow and to prevent saturation a new higher capacity aircraft was needed and as such more than 1,000 super sized planes would be needed over the coming 20 years. Jetliners Be advised that, after further review, the Jetliners analysts concluded the number of new aircraft needed during the next twenty years would be within thirty percent of the upper level outlined by Acme Airline in that context.


Given the demand and cost data you will have available (see information below), briefly describe the process you would use to determine optimum output and price levels in the development and production of the new super sized equipment. The purpose of this section is not to perform any analytical evaluation, but rather provide a verbal description of the process you believe to be appropriate.



Given the following:



Acme Airline


P = 182.868 - 0.0003Q

P = 198.6592 - 0.00013Q

AVC Curve

TVC = 104.8822Q - 0.001Q + 0.09Q2

TVC = 25.8678Q - 0.00023Q + 0.4Q2


In addition, the joint group analysis determined the market would bear a price per plane somewhere within the following parameters:

Table 1

Price per plane
(million $)









1.  First estimate the price per plane using the estimated prices and probabilities given in Table 1. 

2.  Determine the optimum prices and outputs for both Jetliners and Acme Airline if they decide to proceed individually without collaborating in the development of the super sized aircraft. Use the Demand and AVC equations outlined above in this analysis. Determine the profitability of this approach for each of the companies if the Fixed Costs are $500 million and $700 million for Jetliners and Acme Airline, respectively. 

3.  Now analyze the potential for a collaborative approach by Jetliners and Acme Airline. Assume there is a 50% probability that each of the companies' estimates is accurate in the Demand and Cost equations provided above. (Multiply both the demand and cost curves for each of the entities by 0.5, add them together. Then use that result to determine optimum price/quantity levels if they collaborate.)  Also determine profitability assuming that the joint Fixed Cost is $600 million. 

4.  Finally, summarize the results of your analysis and make a recommendation about what you consider the most appropriate process for Jetliners and Acme Airline to use in the development of the super sized equipment. Use an Excel® spreadsheet to summarize the results. It might also be useful to construct an Excel® section for the quadratic formula that will be required for the analysis. 


Answer A

Process that can be used to determine optimum output and price levels is "Regression Analysis". In this process,  the relationship between a dependent variable and one or more independent variables are used to find out optimal output and price.



Eg: In this process, output quantity will be taken from 10 or 100 and increased gradually for desired optimum level of profit. Where the profit trend starts falling, it is said to be in declining trend. So, the output and price where the profit is optimum is called optimum output and optimum price.

Answer B        
Solution 1        
  Estimated Price per Plane    
    Price per plane Probability Estimated Price
    (million $)
    125 0.25 31.25
    175 0.25 43.75
    225 0.5 112.5
    Estimated Price 187.5
Solution 2        
      Jetliners Acme Airline
    Demand P = 182.868 – 0.0003Q P = 198.6592 – 0.00013Q
    AVC Curve TVC = 104.8822Q – 0.001Q + 0.09Q2 TVC = 25.8678Q – 0.00023Q + 0.4Q2
    On Regression analysis application of quantities:

Posted Date: 7/13/2012 3:56:24 AM | Location : United States

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