aps7x313_s06

# aps7x313_s06 - Econ 313 - Wissink Spring 2006 PS#7 XtraQ...

This preview shows pages 1–2. Sign up to view the full content.

1. Suppose the airline industry consists of only two firms: Firm1=American and Firm2 =Texas Air Corp. Let the two firms have identical cost functions: tc i (x i ) = 40x i . Assume the demand curve for the industry is given by P = 100 – X where X = x 1 +x 2 , and that each firm expects the other to behave as a Cournot competitor. a. American: Π A = (100 – x A – x T )x A – 40x A FOC: 100 – 2x A – x T – 40 = 0. So American’s reaction function is x A = 30 – (1/2)x T . Texas Air: Π T = (100 – x A – x T )x T – 40x T FOC: 100 – 2x T – x A – 40 = 0. So Texas Air’s reaction function is x T = 30 – (1/2)x A . Solving simultaneously yields: x A CN = 20 = x T CN ; p CN = 60; Π A CN = 400 = Π T CN . b. American’s reaction function is still x A = 30 – (1/2)x T . Texas Air: Π T = (100 – x A – x T )x T – 25x T FOC: 100 – 2x T – x A – 25 = 0. So Texas Air’s reaction function is x T = 37.5 – (1/2)x A . Solving simultaneously yields: x T CN = 30; x A CN = 15; p CN = 55. Texas Air’s profits with the lower costs are Π T CN = (55)30 – (25)30 = 900. With the higher costs, Texas Air’s profits are 400 [see (a)].

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 10/29/2009 for the course ECON 3130 taught by Professor Masson during the Fall '06 term at Cornell.

### Page1 / 2

aps7x313_s06 - Econ 313 - Wissink Spring 2006 PS#7 XtraQ...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online