Reference no: EM13984277
Case study: loan payments in Great Britain's retail banking sector changes in their operating environment have facilitated greater competition in the British retailing banking sector. The market situation prior to this change is modeled as follows. The demand and supply of loans valued at $100,000 each are depicted by the following equations:
Qd = 2,000 - (1/10)P
Qs = (1/20)P - 250
Where Q is the number of loans processed per month and P is the price of loan, calculated as the loan payment less the principal for the life of the loan. Note that, for this example, all loans have the same payment plan and the same payment time frame. Further note that the retail banks have identical cost equations. Each bank's minimum average cost is $15,000 per loan, and this occurs and output of 50 loans per month.
1. Where is the equilibrium price of a loan per customer?
2. What is the consumer demand for $100,000 loans at this payment level?
3. How many equally-sized banks with identical cost functions can compete in this industry without experiencing negative profits?
Now suppose that changes in the operating environment reduce the cost of processing loan such that each bank's minimum average cost is $14,500 per loan and this occurs as an output of 35 loans processed per month. This change in operating environment also shift the industry supply curve to the right, such that it is depicted by the following equation:
Qs = (1/20)P - 175
4. What is the new equilibrium price of a loan per customer following the change in the retail operating environment?
5. What is the new consumer demand for $100,000 loans at the new payment level?
6. Now how many equally-sized retail banks with identical cost function can compete in this industry without experiencing negative profits?
7. Are the cost savings, resulting from the new operating environment, passed on to loan customers? Explain.
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