csggame - Market A: p=257, q=2639.29 profit=1389662.108...

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Market A: p=257, q=2639.29 profit=1389662.108 Market B: P=444, q=2369.282 profit=1383300.273 Market C: p=275 q=2275.469 profit=1367834.422 Market D: P=450 q=4270.68 profit(LOSS)= -1874215.54 In market C, when we are borrowing at a rate of 5%, we are paying an extra $40.25 for each unit of capacity as well as an extra Marginal Cost of .95 MC for each unit produced. Also, in NPV it costs us 373.65657 to build a unit of capacity considering the salvage value we will receive in the end. So basically if we borrow less than $1,000,000 we should produce until the NPV of marginal contribution to profits(taking into account the new Marginal Cost of $19.95 if we are borrowing at a rate of 5%) is equal to the NPV of the cost of an additional unit of capacity(which is 40.25 + 373.65657= 413.90657). This occurs at P= 281 and Q=2189.129. So it may actually be best to borrow money, because we could realize a higher ROI than the interest rate we are being charged. The only concern is competitors. If competitors enter, then we will have to split demand, but demand will also go up as competitors enter. This is due to the variety effect, and it is quite large in market C. The other consideration is the price competition with new competitors, but market C is also highly differentiated and thus we will be able to charge
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This note was uploaded on 03/03/2009 for the course AEM 0120 taught by Professor Staff during the Spring '08 term at Cornell University (Engineering School).

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csggame - Market A: p=257, q=2639.29 profit=1389662.108...

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