Initially, Airlift is the only high-lift tower crane service in the state and provides tower cranes to
construct high-rise buildings.
Suppose Airlift faces a linear market demand curve:
Q=307.5 -0.1P
where P is price per hour for its service in dollars and Q is the number of service hours per month,
Airlif has the following variable costs (for purposes of this problem, you may assume that there are no fixed costs associnted with this service):
TVCa =125Qa
A) Given that Airlif is the only supplier in this market, determine the price Airlif will charge
per hour, the number of hour of service per month, and the profits earned assuring Airlif’s
objective is profit maximization.
Now suppose the situation changes and Hangonhigh decides to enter the market for this service.
Being new to the market, Hangonhigh's costs are different from Airlif's, Again assuming no
fixed costs, Hangonhigh's costs for the service are given by:
TVCb =175Qb
b. If these two firms behave as profit maximizing Coumnot duopolists choosing output level determine each firm's output reaction function.
c How many hours of service will each firm sell?
D) What will be the total number of hours of service and what will be the hourly market pricefor the service?
E) Compare the market outcores under monopoly conditions to those with two competitors,
Specifically, how does price and output (hours of service sold) compare after the entry by
Hangernhigh
Bonus
Suppose instead of a Courot duopoly, that the Stackelberg
model is the appropriate one given that Airlif
could anticipate Hangemhigh's, entry and use
its first-mover or dominant firm position to its advantage. Under this scenario, how much
output would each firm offer and what would be the market price for the service?
