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

Two firms compete in a homogeneous product market where the inverse demand function is P $=102$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$$s rent of $$0\mathrm{.}5$ million regardless of its production decision. Firm $1$s marginal cost is $$2,$ and Firm $2$s marginal cost is $$6.$ The current market price is $$8$ 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 $1$s marginal cost is lower than Firm $2$s marginal cost?

multiple choice $1$

Learning curve effects Correct

Direct network externality

Limit pricing

Second$-$mover advantage

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

Instructions: Enter all responses rounded to two decimal places.

Firm $1\text{'}$s profits: $ $2\mathrm{.}50$ Numeric ResponseEdit Unavailable. $2\mathrm{.}50$ correct.million

$$

Firm $2\text{'}$s profits: $ $0\mathrm{.}50$ Numeric ResponseEdit Unavailable. $0\mathrm{.}50$ correct.million

c$.$ What would each firm$$s current profits be if Firm $1$ reduced its price to $$6$ while Firm $2$ continued to charge $$8?$

Instructions: Enter all responses to two decimal places.

Firm $1\text{'}$s profits: $ $7\mathrm{.}50$ Numeric ResponseEdit Unavailable. $7\mathrm{.}50$ correct.million

$$

Firm $2\text{'}$s profits: $ $1\mathrm{.}5$ Numeric ResponseEdit Unavailable. $1\mathrm{.}5$ incorrect.million

d$.$ Suppose that, by cutting its price to $$6,$ Firm $1$ is able to drive Firm $2$ completely out of the market. After Firm $2$ exits the market, does Firm $1$ have an incentive to raise its price?

multiple choice $2$

Yes

No Correct

e$.$ Is Firm $1$ engaging in predatory pricing when it cuts its price from $$8$ to $$6?$

multiple choice $3$

No Correct

Yes