I need to solve this, and have no idea how to do it. Thanks in advance for your help!!

Entry and Technological Change

Let’s assume that the monthly demand curve for bread is given by

P = 15 -

Q

1000.

Suppose the two main costs involved in this business are (1) a fixed cost of leasing baking

equipment, and (2) variable costs related to raw materials — flour, yeast, water, etc.

Let the fixed cost of leasing baking equipment be $8000 per month. Let the marginal cost of

producing a loaf of bread be $1. (Assume that all firms in this market lease all their equipment

on a month-to-month basis.)

(a) Suppose there are two firms in this market. Compute equilibrium quantities and profits

for each firm, and the equilibrium market price. Hint: Start with thinking about the

number of loaves a firm will sell in a month — this quantity must be where its marginal

revenue is equal to its marginal cost. But notice that firm 1’s marginal revenue will

depend on firm 2’s quantity choice, and vice versa. To construct a spreadsheet, start by

constructing a formula for firm 1’s marginal revenue as a function of its quantity choice

and firm 2’s quantity choice. If firm 1 is making 1000 loaves and firm 2 is also making 1000

loaves, then firm 1’s marginal revenue is how its revenue changes if it increases quantity

by one, assuming firm 2 keeps its quantity at 1000. Do the same firm firm 2, and then

use Solver to find quantities where MR = MC for both firms.

(b) Should a third bread firm enter?

(c) A fourth firm? A fifth? Compute the equilibrium number of bread-baking firms in this

market, the equilibrium price of a loaf, and the number of loaves baked by each firm in a

month.

(d) Suppose the price of leasing bread equipment falls to $7,000 per month. Compute the

equilibrum number of bread-baking firms in this market, the equilibrium price of a loaf,

and the number of loaves baked by each firm in a month. Compare the price of bread to

your answer in (c) — do fixed costs affect prices? If so, how and why?

(e) Return to the assumption that the monthly price to lease bread equipment is $8,000, and

suppose the current market equilibrium is the same as what you computed in (c). A Bread

Institute scientist develops a new method — which he calls the “Inbreadible!” technique

— for baking bread. The good news is that the Inbreadible! method makes much more

effective use of bread ingredients — the marginal cost of producing a loaf of bread drops

to 10 cents when using the new technique. The bad news is that the Inbreadible! method

requires a lot of new bread-making equipment — the monthly leasing cost for Inbreadible!

equipment is currently around $18,000. The scientist is hard at work trying to improve

his method to reduce this large fixed cost.

The scientist hires you to help with market planning. His main question is this: “How

low do my fixed costs need to be before I am certain that I’ll be able to enter this market

profitably?”

(f) Suppose the scientist succeeds at reducing the Inbreadible! fixed cost to $14,000. Should

he enter? (The right answer is “maybe.” Your job is to explain why.)