In the fake country of Oz there is only 1 burger joint, BamaDonalds; it can produce burgers at a constant average cost and marginal cost of $2 per burger. Demand for burgers in Oz is represented by this demand curve: Q = 40 - P .
A) Question: Calculate the profit-maximizing price per burger, quantity of burgers, and total profits for BamaDonalds. (It must charge the same price per burger to all customers.)
Now a second burger joint opens, One King that also can produce donuts at a constant average cost and marginal cost of $2 per burger. (Total demand for burgers in Oz remains Q = 40 - P). Suppose that the two burger joints compete in the burger market according to the Bertrand model so that a Bertrand equilibrium results. Also suppose that in the Bertrand equilibrium, each firm has a 50% market share in the burger market.
B) Question: Calculate the profit-maximizing price per burger, quantity of burgers, and total profits for BamaDonalds and One King in the Bertrand equilibrium. (Each firm must charge the same price per burger to all customers.)
C) The giant energy corporation ExxonMobil reported total revenue of $482 billion and total after-tax profits of $44.9 billion in 2013. Are these “huge” profits consistent with the “contestable markets” theory of oligopoly? Carefully explain why or why not in three sentences or more.