3) You were recently chosen to be the new CEO of Rocket to the Moon, a company that contracts with NASA and many corporations to launch satellites. Your Business Intelligence Officer, whom you affectionately refer to as Rocketman, estimates that the worldwide market demand curve for rocket launches is Q = 25,000 - P/20. Including Rocket to the Moon, there are a total of three firms in the rocket business, each with a marginal cost of $200K per rocket launch. Firms in the rocket business must build each rocket they launch from the ground up, so there is considerable effort put into forecasting market demand, as well as the actions of competitors. a. What model would best characterize the rocket business, Cournot or Bertrand? Why? b. What is the equilibrium price, quantity, and profits for each firm in the market, assuming it is characterized by Cournot competition? How does your answer change if you assume the market is better characterized by Bertrand's competition? In what follows, assume that Rocketman has informed you that the market is characterized by Cournot competition. c. What price would the firms set if they were operating as a monopoly? If all three firms set the monopoly price and split the profits, what would their profits be? d. Assume the three firms face this decision on an annual basis for five years. Is there an equilibrium where all of the firms would set the monopoly price in the first year? Why or why not? e. Assume the three firms face this pricing decision annually for the foreseeable future. What is the minimum discount factor that would allow the firms to set the monopoly price and split the profits equally each year using a grim strategy?
3) You were recently chosen to be the new CEO of Rocket to the Moon, a company that contracts with NASA and many corporations to launch satellites. Your Business Intelligence Officer, whom you affectionately refer to as Rocketman, estimates that the worldwide market demand curve for rocket launches is Q = 25,000 - P/20. Including Rocket to the Moon, there are a total of three firms in the rocket business, each with a marginal cost of $200K per rocket launch. Firms in the rocket business must build each rocket they launch from the ground up, so there is considerable effort put into forecasting market demand, as well as the actions of competitors. a. What model would best characterize the rocket business, Cournot or Bertrand? Why? b. What is the equilibrium price, quantity, and profits for each firm in the market, assuming it is characterized by Cournot competition? How does your answer change if you assume the market is better characterized by Bertrand's competition? In what follows, assume that Rocketman has informed you that the market is characterized by Cournot competition. c. What price would the firms set if they were operating as a monopoly? If all three firms set the monopoly price and split the profits, what would their profits be? d. Assume the three firms face this decision on an annual basis for five years. Is there an equilibrium where all of the firms would set the monopoly price in the first year? Why or why not? e. Assume the three firms face this pricing decision annually for the foreseeable future. What is the minimum discount factor that would allow the firms to set the monopoly price and split the profits equally each year using a grim strategy?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3) You were recently chosen to be the new CEO of Rocket to the Moon, a company that contracts with NASA and many corporations to launch satellites. Your Business Intelligence Officer, whom you affectionately refer to as Rocketman, estimates that the worldwide market demand curve for rocket launches is Q = 25,000 – P/20. Including Rocket to the Moon, there are a total of three firms in the rocket business, each with a marginal cost of $200K per rocket launch. Firms in the rocket business must build each rocket they launch from the ground up, so there is considerable effort put into forecasting market demand, as well as the actions of competitors.
a. What model would best characterize the rocket business, Cournot or Bertrand? Why?
b. What is the equilibrium price, quantity, and profits for each firm in the market, assuming it is characterized by Cournot competition? How does your answer change if you assume the market is better characterized by Bertrand's competition?
In what follows, assume that Rocketman has informed you that the market is characterized by Cournot competition.
c. What price would the firms set if they were operating as a monopoly? If all three firms set the monopoly price and split the profits, what would their profits be?
d. Assume the three firms face this decision on an annual basis for five years. Is there an equilibrium where all of the firms would set the monopoly price in the first year? Why or why not?
e. Assume the three firms face this pricing decision annually for the foreseeable future. What is the minimum discount factor that would allow the firms to set the monopoly price and split the profits equally each year using a grim strategy?
Expert Solution
Step 1
The Bertrand model uses the price of a unit of a product to effect market demand, whereas the Cournot model uses businesses' ability to manage their level of production to affect market pricing.
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