Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
9th Edition
ISBN: 9781259290619
Author: Michael Baye, Jeff Prince
Publisher: McGraw-Hill Education
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Chapter 9, Problem 24PAA
To determine
Whether the given example refutes or support the characterization of airline industry.
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In the late 1990s, Vanguard Airlines operated as a low-cost carrier, offering low prices and limited services, out of Kansas City, Missouri. Not long after its inception, Vanguard began offering a significant number of flights based out of Midway International Airport in Chicago, Illinois, as well. When Vanguard expanded to Midway, incumbent airlines, such as Delta, quickly responded to its low fares by offering many competing flights at comparably low prices. The intense price competition ultimately caused Vanguard to exit Midway in 2000 and file for bankruptcy in 2002. At varying points in time, the airline industry has been described as a contestable market; does the example of Vanguard support or refute this characterization of the airline industry? Explain
Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, compute the present value of Smyth Industries' profits if it could have remained a monopoly when the interest rate was 5 percent.
Multiple Choice
$210 million
$200 million
$1.05 billion
$100 million
Suppose that, prior to other firms entering the market, the maker of a new smartphone (Way Cool, Inc.) earns $80 million per year. By reducing its price by 60 percent, Way Cool could discourage entry into “its” market, but doing so would cause its profits to sink to −$2 million. By pricing such that other firms would be able to enter the market, Way Cool’s profits would drop to $30 million for the indefinite future. In light of these estimates, do you think it is profitable for Way Cool to engage in limit pricing? Is any additional information needed to formulate an answer to this question? Explain.
Chapter 9 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
Ch. 9 - Prob. 1CACQCh. 9 - Prob. 2CACQCh. 9 - Prob. 3CACQCh. 9 - Prob. 4CACQCh. 9 - Prob. 5CACQCh. 9 - Prob. 6CACQCh. 9 - Prob. 7CACQCh. 9 - Prob. 8CACQCh. 9 - Prob. 9CACQCh. 9 - Prob. 10CACQ
Ch. 9 - Prob. 11PAACh. 9 - Prob. 12PAACh. 9 - Prob. 13PAACh. 9 - Prob. 14PAACh. 9 - The opening statement on the website of the...Ch. 9 - Prob. 16PAACh. 9 - Prob. 17PAACh. 9 - Prob. 18PAACh. 9 - Prob. 19PAACh. 9 - Prob. 20PAACh. 9 - Prob. 21PAACh. 9 - Prob. 22PAACh. 9 - Prob. 23PAACh. 9 - Prob. 24PAA
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