A cookie store is based in Ripon, WI. They give free samples! As of January 2013, Girls Scouts of Wisconsin Southeast became their main competitor after adopting a direct sales model. Girl Scouts now bring cookies door-to-door rather than only accepting orders for later delivery. Suppose the market demand for cookies is given by Q = 3600 6P and initially both produce at equal marginal cost, c0.

1. Assuming initially c0 = 375. Suppose now that Rippin' Good invests heavily in R&D and reduces its unit production cost to c1 = 200. What price should Rippin' Good set and how is the market divided between them and Girl Scouts? Is this a large or small innovation?

2. Suppose now that Rippin' Good invests heavily in R&D and reduces its unit production cost to c2 = $100. Assuming initially c0 = 375, what will be Rippin' Good's optimal price and quantity after the cost-saving innovation? Is this a large or small innovation?