Two firms compete in a homogeneous product market where the inverse demand function is P = 10 2Q (quantity
a. Why do you think firm 1’s marginal cost is lower than firm 2’s marginal cost?
b. Determine the current profits of the two firms.
c. What would happen to each firm’s current profits if firm 1 reduced its price to $6 while firm 2 continued to charge $8?
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? Explain.
e. Is firm 1 engaging in predatory pricing when it cuts its price from $8 to $6? Explain.
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Question Posted: November 15, 2011 11:01:33