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4. Firm 1 and Firm 2 are in a duopoly, earning each annual profits of £10 million per year. Firm 1 could earn £20 million per year as a monopolist. Firm 1 drops its price to £40 when its marginal cost is £50 and holds it there for a year to be able to drive Firm 2 out of the market. (a) What pricing strategy is the manager of Firm 1 considering? Explain this strategy and how it helps to reduce competition in a market. (b) The year that it drops its price, Firm 1 will lose £10 million. At what level of interest rate i will the strategy of Firm 1 be profitable?

4. Firm 1 and Firm 2 are in a duopoly, earning each annual profits of £10 million per year. Firm 1 could earn £20 million per year as a monopolist. Firm 1 drops its price to £40 when its marginal cost is £50 and holds it there for a year to be able to drive Firm 2 out of the market. (a) What pricing strategy is the manager of Firm 1 considering? Explain this strategy and how it helps to reduce competition in a market. (b) The year that it drops its price, Firm 1 will lose £10 million. At what level of interest rate i will the strategy of Firm 1 be profitable?

Principles of Economics, 7th Edition (MindTap Course List)
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN:9781285165875
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: Monopolistic Competition
Section: Chapter Questions
Problem 5QCMC
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4. Firm 1 and Firm 2 are in a duopoly, earning each annual profits of £10 million per year. Firm 1 could earn £20 million per year as a monopolist. Firm 1 drops its price to £40 when its marginal cost is £50 and holds it there for a year to be able to drive Firm 2 out of the market. (a) What pricing strategy is the manager of Firm 1 considering? Explain this strategy and how it helps to reduce competition in a market. (b) The year that it drops its price, Firm 1 will lose £10 million. At what level of interest rate i will the strategy of Firm 1 be profitable?
Transcribed Image Text:4. Firm 1 and Firm 2 are in a duopoly, earning each annual profits of £10 million per year. Firm 1 could earn £20 million per year as a monopolist. Firm 1 drops its price to £40 when its marginal cost is £50 and holds it there for a year to be able to drive Firm 2 out of the market. (a) What pricing strategy is the manager of Firm 1 considering? Explain this strategy and how it helps to reduce competition in a market. (b) The year that it drops its price, Firm 1 will lose £10 million. At what level of interest rate i will the strategy of Firm 1 be profitable?
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