Problem M$2-03($algo$)$

S

Two firms compete in a homogeneous product market where the inverse demand function is P $=20-5$Q $($quantity is measured in millions$).$ Firm $1$ has been in business for one year, while Firm $2$ just recently entered the market. Each firm has a legal obligation to pay one year's rent of $$2$ million regardless of its production decision. Firm $1\text{'}$s marginal cost is $$2,$ and Firm $2\text{'}$s marginal cost is $$10.$ The current market price is $$15$ and was set optimally last year when Firm $1$ was the only firm in the market. At present, each firm has a $50$ percent share of the market

a$.$ Based on the information above, what is the likely reason that Firm $1\text{'}$s marginal cost is lower than Firm $2\text{'}$s marginal cost?

$$Second$-$mover advantage

$$Direct network externality

$$Learning curve effects

$$Limit pricing

b$.$ Determine the current profits of the two firms.

Instructions: Enter all responses rounded to two decimal places.

Firm $1\text{'}$s profits: $

million