Question

Bombardier and Embraer have a duopoly in the production of commercial aircraft used as regional jets that seat 40-100 passengers. Suppose the marginal cost of producing each plane is $10M, there are no fixed costs, and the global demand for regional jets is given by the table below:

Price	Qty demanded
50M	50 planes
45M	100 planes
40M	150 planes
35M	200 planes
30M	250 planes
25M	300 planes
20M	350 planes
15M	400 planes
10M	450 planes
5M	500 planes

1. What is the socially efficient quantity of planes?

2. If, instead, Bombardier and Embraer form a cartel and sustain full cooperation (price like a monopolist), at what price and quantity would they sell them? Assuming they evenly split the production, how much profit would they each make?

3. If Embraer sticks to the deal, in what direction and by how much would Bombardier’s profits change if they increased production by 50 planes?

Answer 1

a) Socially efficient quantity of planes where P = MC = 10

So Social efficient quantity is 450 planes.

b) If they form cartel so they produce where MR = MC

Price	Qty demanded	Total revenue	Marginal revenue
50M	50 planes	50*50 = 2500	---
45M	100 planes	45*100 = 4500	(4500-2500)/ (100-50) = 40
40M	150 planes	6000	30
35M	200 planes	7000	20
30M	250 planes	7500	10
25M	300 planes	7500	0
20M	350 planes	7000	-10
15M	400 planes	6000	-20
10M	450 planes	4500	-30
5M	500 planes	2500	-40

MR =MC = 10 when Q= 250 planes

Each produce 250/2 = 125 planes

Price = 30M

Total profit = TR - TC = 7500 - (10*250) = 5000

If they evenly split,

So each will make a profit of =  5000/2 = $2500

c) If Embraer sticks to the deal and Bombardier increase production by 50 planes,

Embraer produce = 125

Bombardier produce = 125+50 = 175

so Total production will be = 125+ (125+50) =300

Price reduce to $25 M

Now, profit of Bombardier = TR - TC

= 175*25 - (175*10) = 2625

His profit will increase by 2625 - 2500 = $125