Figure 6.5 Japanese Market for Jetliners

-Consider the Japanese market for jetliners as depicted in Figure 6.5.Suppose lone producer of jetliners in the world is Boeing and Boeing 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 lone producer of jetliners in the world is Boeing and Boeing 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

In a monopoly, the profit-maximizing output is where marginal revenue equals marginal cost. Since Airbus and Boeing have the same marginal cost, the marginal cost for the market is $20 million. We can find the quantity produced by equating the market demand and marginal revenue equations. 
Market demand: 350 - Q
Marginal revenue: 350 - 2Q
Setting marginal revenue equal to marginal cost, we get:
350 - 2Q = 20
Q = 165
Thus, Airbus produces 165 jetliners. 
Airbus' total revenue is:
TR = P x Q
P = 350 - Q
TR = (350 - Q) x Q
TR = 57,750
Airbus' total cost is:
TC = MC x Q
TC = 20 x 165
TC = 3,300
Airbus' profit is:
Profit = TR - TC - Subsidy
Profit = 57,750 - 3,300 - (8m x 165)
Profit = $416 million.