You are the manager of BlackSpot Computers, which competes directly with Condens

Question

You are the manager of BlackSpot Computers, which competes directly with Condensed Computers to sell high-powered computers to businesses. From the two businesses’ perspectives, the two products are indistinguishable. The large investment required to build production facilities prohibits other firms from entering this market, and existing firms operate under the assumption that the rival will hold output constant. The inverse market demand for computers is P = 5,900 – Q and both firms produce at a marginal cost of $800 per computer. Currently, BlackSpot earns revenues of $4.25 million and profits (net of investment, R&D, and other fixed costs) of $890,000. The engineering department at BlackSpot has been steadily working on developing an assembly method that would dramatically reduce the marginal cost of producing these high-powered computers and has found a process that allows it to manufacture each computer at a marginal cost of $500. How much will this process improve BlackSpot's profits?

(Hint: Consider solving for the duopoly outcome before and after the change in BlackSpot's marginal costs.)

$________

Explanation / Answer

Inverse demand curve: P = 5,900 – Q

Marginal revenue = 5900 – 2Q = 800

2Q = 5900 – 800 = 5100

Q = 5100 / 2 = 2550.

P = 5900 – Q (2550) = $3250

If marginal cost is $500, then the output would be:

P = 5900 – 2Q = 500

2Q = 5400

Q = 2700.

P = 5900 – 2700 = $3200

Total revenue = $3200 x 2700 = 8,640,000

Total costs = 4,250,000 - $890,000 = $3,360,000

Profits when the marginal cost is reduced to $500

Profits = Total revenue – Total costs (8,640,000- 3,360,000)

Profits = $5,280,000.

*****

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