Baker Enterprises operates a midsized company that specializes in the production of a unique type of memory chip. It is currently the only firm in the market, and it earns $10 million per year by charging the monopoly price of $115 per chip. Baker is concerned that a new firm might soon attempt to clone its product. If successful, this would reduce Baker’s profit to $4 million per year. Estimates indicate that, if Baker increases its output to 280,000 units (which would lower its price to $100 per chip), the entrant will stay out of the market and Baker will earn profits of $8 million per year for the indefinite future. 1. What must Baker do to credibly deter entry by limit pricing? 2. Does it make sense for Baker to limit price if the interest rate is 10 percent?
Baker Enterprises operates a midsized company that specializes in the production of a unique type of memory chip. It is currently the only firm in the market, and it earns $10 million per year by charging the
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