Determine the optimum prices and outputs-probability, Macroeconomics

Given the following:

Airbus Boeing
Demand P = 182.868 - 0.0003Q P = 198.6592 - 0.00013Q
TVC Curve TVC = 104.8822Q - 0.001Q^2 + 0.09Q^3 TVC = 25.8678Q - 0.00023Q^2 + 0.4Q^3

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 $) Probability
125 .25
175 .25
225 .5

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 Airbus and Boeing if they decide to proceed individually without collaborating in the development of the VLCT. 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 Airbus and Boeing, respectively.

3. Now analyze the potential for a collaborative approach by Airbus and Boeing. 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 Airbus and Boeing to use in the development of the VLCT equipment. It is recommended that you 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.

Posted Date: 3/25/2013 2:11:58 AM | Location : United States

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