Find U-To’s first order condition for profit-maximization. e.Find the profit-maximizing price and quantity chosen by U-To, and the quantity supplied by the follower firms.
U-To is a price leader in the market for truck rentals. There are many small follower firms that take U-To’s price P as given and then supply truck rentals according to the supply function S(P)=P-50 for P≥50, and S(P)=0 for P<50. Thedemand for truck rentals is given by QD(P)=100-P. U-To’s cost function is C(QL)=100+40QL.
a.Find the residual
b.Find the inverse residual demand curve facing U-To.
c.Write down U-To’s profit function, taking into account the follower firms response to U-To’s decision.
d.Find U-To’s first order condition for profit-maximization.
e.Find the profit-maximizing price and quantity chosen by U-To, and the quantity supplied by the follower firms.
f.Suppose demand decreased to QD(P)=60-P. Redo parts (a) – (e) with the new demand curve.
Answer d,e,f
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