Chapter 12R, Problem 24MCQ

To determine

The correct option that will happen if Company W will not build a new store.

Answer to Problem 24MCQ

Option c is correct.

Explanation of Solution

Explanation for correct option:

c.

As per the given information, the Company W will build a store and will earn profit of $100,000 as shown in the graph below:

  

Therefore, option c is correct.

Explanation for incorrect options:

a.

The firm believes that firm LB will not build a new store this will create two situation one is when Firm W will also not build a new store and second when Firm W will build a new store.

If it will build a new store then it will earn profit of $100,000. The firm will chose where it can earn profit. Therefore, option a is incorrect.

b.

If Firm W will not build then it is tit-for-tat strategy but doing so will not allow the firm to earn profit. Therefore, option b is also incorrect.

d.

If Firm W will build new store when Firm LB is not building the store then it will earn profit of $100,000 instead of $25,000. Therefore, option d is incorrect.

e.

It will make a difference as competition will increase if both will build a new store. Therefore, option e is incorrect.

Economics Concept Introduction

Monopolistic market structure: Market structure where theres are many firms selling identical but products with different features. There are low barriers to entry and exit which allows firms to enter the market easily.