3. Suppose that firm 1 can expand production to 12, at which point its capacity is...

 

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3. Suppose that firm 1 can expand production to 12, at which point its capacity is constrained. Ignoring antitrust concerns, it considers a predatory strategy of increasing its output so that firm 2 incurs losses, hoping to drive its rival out of the market. Firm 2 wants to stay in the market and will resist predation if it can; remaining active requires a minimum output level of 4. Firm 1 knows that its rival has financial resources of 48 and is unable to raise additional funds if it is making losses. Firm 1 has unlimited resources. 1) [10 marks] What would be firm 2's annual loss during the period of predation? How long must predation be continued in order to drive firm 2 out of the market? What would be the annual cost of the predatory strategy to firm 1? What would be firm I's total loss during predation? 2) [10 marks] Firm 1 estimates that it will be able to operate as a monopoly for 2 years | after the exit of firm 2 before it faces successful entry by another firm into the industry. Assuming no discounting, will the predatory strategy be pursued by firm 1? Explain. 3. Suppose that firm 1 can expand production to 12, at which point its capacity is constrained. Ignoring antitrust concerns, it considers a predatory strategy of increasing its output so that firm 2 incurs losses, hoping to drive its rival out of the market. Firm 2 wants to stay in the market and will resist predation if it can; remaining active requires a minimum output level of 4. Firm 1 knows that its rival has financial resources of 48 and is unable to raise additional funds if it is making losses. Firm 1 has unlimited resources. 1) [10 marks] What would be firm 2's annual loss during the period of predation? How long must predation be continued in order to drive firm 2 out of the market? What would be the annual cost of the predatory strategy to firm 1? What would be firm I's total loss during predation? 2) [10 marks] Firm 1 estimates that it will be able to operate as a monopoly for 2 years | after the exit of firm 2 before it faces successful entry by another firm into the industry. Assuming no discounting, will the predatory strategy be pursued by firm 1? Explain.

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Firm 2s annual loss during the period of predation would be expand p... View the full answer