Long-run competition. Much of the cost of building a modern commercial jet comes from the fixed cost of designing the planes and establishing and maintaining a maintenance system. By contrast, the marginal cost of producing another plane is relatively low.

a) You have been hired by Airbus to recommend pricing and marketing strategies. Draw a hypothetical Average Total Cost curve for planes. Draw a Marginal Cost curve for producing additional planes.

b) Show the area of profit or loss as the difference between average total cost and the price if planes are sold at marginal cost. What will happen to the industry and the number of companies under competitive conditions?

c) How would your pricing and production change if you regard Airbus as a monopolist? Show the effect of a monopoly on prices, output, and profits.