Figure 6.5 Japanese Market for Jetliners
-Consider the Japanese market for jetliners as depicted in Figure 6.5.Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner, but now a European manufacturer, Airbus, begins production.Airbus faces the same marginal cost as Boeing, but the European government provides Airbus with a subsidy of $8 million per jetliner produced.As a result of the competition, Boeing leaves the Japanese market leaving Airbus as a monopoly.How much profit will Airbus earn?

Question

Figure 6.5 Japanese Market for Jetliners 
-Consider the Japanese market for jetliners as depicted in Figure 6.5.Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner, but now a European manufacturer, Airbus, begins production.Airbus faces the same marginal cost as Boeing, but the European government provides Airbus with a subsidy of $8 million per jetliner produced.As a result of the competition, Boeing leaves the Japanese market leaving Airbus as a monopoly.How much profit will Airbus earn?

Quizplus · Accepted Answer

With Boeing out of the market, Airbus faces the demand curve alone. From the graph, the demand curve intersects the marginal cost curve at a quantity of 12 jetliners per year. At this quantity, the price is $38 million per jetliner. With the $8 million subsidy, the total profit per jetliner is ($38 million - $20 million + $8 million) = $26 million. Therefore, total profit for Airbus is $26 million x 12 jetliners = $312 million. However, Airbus incurs a fixed cost of $100 million for entering the market, so total profit is $312 million - $100 million = $212 million. With the subsidy included, total profit becomes $212 million + $8 million x 12 jetliners = $416 million. Therefore, the correct answer is C.