8 Two firms compete in a homogeneous product market where the inverse demand fun

Question

8 Two firms compete in a homogeneous product market where the inverse demand function is P- 20-5Q (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 $0.2 million regardless of its production decision. Firm 1's marginal cost is $2, and Flrm 2's marginal cost is $10. The current market price is $15 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. nts a. Based on the information above, what is the likely reason that Firm 1's marginal cost is lower than Firm 2's marginal cost? Learning curve effects Direct network externality Limit pricing Second-mover advantage b. Determine the current profits of the two firms Instruction: Enter all responses rounded to two decimal places Firm t's profits:million Firm 2's profits: $ meson c What would each firm's current profits be if Firm 1 reduced its price to $10 while Firm 2 continued to charge $15 Instruction: Enter all responses to two decimal places Firm l's profits: $ [ million Firm 2's profits: $ | million .

Explanation / Answer

A) learning curve effect.

B)when price is 15, then 15=20-5Q thus Q=1million. Both firm will produce 0.5million.

Firms 1 profit=(15-2)*0.5-0.2=6.3million

Firms 2 profit=(15-10)*0.5-0.2=2.3 million

C) when price=10 then Q=2 million and all will purchase from firm 1

Firm 1 profit=2(10-2)-0.2=15.8 million and firm 2 losses 0.2 million$.

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