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[Solution Library] Two firms compete in a homogeneous product market where the inverse demand function is P=10-2 Q (quantity is measured in millions). Firm 1 has

Question: Two firms compete in a homogeneous product market where the inverse demand function is \(P=10-2 Q\) (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 $1 million regardless of its production decision. Firm l'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.

  1. Why do you think firm 1 's marginal cost is lower than firm 2 's marginal cost?
  2. 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.
    Price: $2.99
    Solution: The downloadable solution consists of 2 pages
    Deliverable: Word Document


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