# What would each firms current profits be if Firm 1 reduced its price to \$6 while Firm 2 continued to charge \$8?

(q Show more Two firms compete in a homogeneous product market where the inverse demand function is P = 10 -2Q (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 years rent of \$0.4 million regardless of its production decision. Firm 1s marginal cost is \$2 and Firm 2s 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. a. Based on the information above what is the likely reason that Firm 1s marginal cost is lower than Firm 2s marginal cost? Limit pricing Direct network externality Learning curve effects Second-mover advantage b. Determine the current profits of the two firms. Instruction: Round all answers to the nearest penny (two decimal places). Firm 1s profits: \$ million Firm 2s profits: \$ million c. What would each firms current profits be if Firm 1 reduced its price to \$6 while Firm 2 continued to charge \$8? Instruction: Round all answers to the nearest penny (two decimal places). Firm 1s profits: \$ million Firm 2s profits: \$ million 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? Yes No e. Is Firm 1 engaging in predatory pricing when it cuts its price from \$8 to \$6? (Click to select)YesNo Show less

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