Two firms compete in a small market that is growing moderately. Both are current

Question

Two firms compete in a small market that is growing moderately. Both are currently producing at capacity, and each is thinking about expanding its capacity by building a new plant. If one firm builds a new plant, its profit will increase and the other firm's profit will remain unchanged. However, if they both build new plants, there will be excess capacity in the market and both firms' profits will decrease. Clearly, each firm would like to be the only one that builds a new plant.

Firm 1 would like to signal to Firm 2 that it is going to build a new plant. Which of the following would be the least credible signal it could send?

A.

Place help wanted advertisements and begin hiring new production workers.

B.

Sign a contract with a construction company to build a new plant.

C.

Announce that it plans to build a new plant.

D.

Purchase a piece of land on which to build a new plant.

Explanation / Answer

Answer is option C) because it only announced that it planning not going to build a plant. It has not taken any working action to build a plant yet in option C.

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