Economics: Other Economics Problems – #29496

Question: You operate your own small building company and have decided to bid on a government contract to build a pedestrian walkway in a national park during the coming winter. The walkway is to be of standard government design and should involve no unexpected costs. Your present capacity utilization rate is moderate and allows sufficient scope to understand this contract, if you win it. You calculate your incremental costs to be $268,000 and your fully allocated costs to be$440,000. Your usual practice is to add between 60% and 80% to your incremental costs, depending on capacity utilization rate and other factors. You expect three other firms to also bid on this contract, and you have assembled the following competitor intelligence about those companies.

a. What price would you bid if you must win the project?

b. What price would you bid if you want to maximize the expected value of the contribution from this contract?

c. Defend your answers with discussion, making any assumptions you feel are reasonable and/or are supported by the information provided.