05 Jun Question Problem 1. On October 20, 2000
Question
Problem 1. On October 20, 2000 it was rumored that United Technologies Corporation (a maker of aircraft engines) was expected to announce an offer for Honeywell (producer of avionics) for about $50 a share. One Lehman analyst observed that the two firms had ‘highly complementary product lines’ that would allow them to exploit ‘powerful revenue and cost synergies.’
Two days later, GE under Jack Welch responded with a bid of $55 a share. United Technolo- gies Corporation dropped out immediately. A Salomon Smith Barney analyst wrote: “Had United Technologies bought Honeywell, the new company would dominate every system in the airplane, plus have a good position in engines (Pratt and Whitney). … GE would have been left with only engines and no other aircraft systems.”
In thinking about the GE/Honeywell merger, focus on customers (think Boeing and Airbus) who buy two complementary components (call them engines and avionics) from two separate monopolies. The two products are complements (an increase in the price of one results in a decrease in demand for the other) because a higher price for one component reduces overall demand for aircraft and therefore demand for the other component. What happens if the two monopolies merge, producing a bundle? Will prices go up or down?
To make it concrete let pe be the price of engines and pa the price of avionics. The demand for engines and avionics is given in the equations below:
De = 1 ? pe ? pa
Da = 1 ? pe ? pa
Suppose the unit cost of engines as well as avionics is $0 a unit. 1.
Scenario 1: Two Separate Monopolies
Suppose engines are produced by one firm and avionics by another. Use the markup formula to compute the optimal price that the engine producer should charge as a function of the avionics price. Use the markup formula to compute the optimal price that the avionics producer should charge as a function of the engine makers price. Use these two expressions to determine equilibrium prices for each firm.
2. Scenario 2: One Monopoly making both products. Suppose engines and avionics are produced by a single firm. What price will it charge for each product to maximize profit?
Problem 2. Suppose that any firm intending to produce SOMA must build an integer number of plants: 0, 1, 2, …. Building Q plants costs each firm 3.5Q dollars. Each plant produces one unit of SOMA. If firm 1 builds Q1 plants and firm 2 builds Q2 plants, the market price p for one unit of SOMA will be 6?(Q1 +Q2). Hint: make up a table.
1. If there was a single firm capable of producing SOMA, how many plants would it install to maximize profit?
2. Suppose now there are two firms capable of producing SOMA. Each chooses the number of plants it must build independently of each other and at the same time. What is the equilibrium number of plants that will be built by each?
3. Suppose that firm 1 builds before firm 2. How many plants should firm 1 build and what will firm 2’s reaction be?
Tutorials for this Question
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.