1. It is 1908 and you are the CEO of Ford Motor Company. General Motors started producing cars this year and has quickly become your chief rival. Their recent entrance, as well as your assembly line methods, allows you the advantage of producing cars faster and choosing your output levels first. Assume the 1908 inverse demand function for cars is P = 3900 - Q (customers view cars as identical products at this point in time) and production costs are C(qi) = 100qi. a. What is Ford’s profit-maximizing output level? GM's? b. What is the market equilibrium price? c. How much profit does each firm earn? d. As the assembly line is used by other firms, the first-mover advantage disappears (fast forward 100 years to present day), and more firms have entered the market (e.g. FCA, Tesla, Hyundai, Toyota, Honda, etc.), what do you expect to happen to Ford’s profit (assume demand and costs are the same)? Explain. e. From 1908 into the 1920s, Ford offered customers one car: the Model T. Further, Henry is famous for saying, “Any customer can have a car painted any color that he wants so long as it is black.” Fast forward to today, Ford offers cars for every desire (models, colors, trim packages, etc.). Explain why Ford has expanded its vehicle line over the last 100 years and discuss the long-run profitability of this strategy.
1. It is 1908 and you are the CEO of Ford Motor Company. General Motors started
producing cars this year and has quickly become your chief rival. Their recent entrance, as well
as your assembly line methods, allows you the advantage of producing cars faster and choosing
your output levels first. Assume the 1908 inverse demand function for cars is P = 3900 - Q
(customers view cars as identical products at this point in time) and production costs are C(qi) =
100qi.
a. What is Ford’s profit-maximizing output level? GM's?
b. What is the
c. How much profit does each firm earn?
d. As the assembly line is used by other firms, the first-mover advantage disappears (fast forward
100 years to present day), and more firms have entered the market (e.g. FCA, Tesla, Hyundai,
Toyota, Honda, etc.), what do you expect to happen to Ford’s profit (assume demand and
costs are the same)? Explain.
e. From 1908 into the 1920s, Ford offered customers one car: the Model T. Further, Henry is
famous for saying, “Any customer can have a car painted any color that he wants so long as it
is black.” Fast forward to today, Ford offers cars for every desire (models, colors, trim
packages, etc.). Explain why Ford has expanded its vehicle line over the last 100 years and
discuss the long-run profitability of this strategy.
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