Need Microeconomics HELP ASAP (Kindly Answer a, b and c) Thank you Consider an i

Question

Need Microeconomics HELP ASAP (Kindly Answer a, b and c) Thank you

Consider an industry with inverse demand:
p (y) = 90 y where y denotes industry output.

There are two firms: firm 1 is the incumbent firm and
firm 2 is the potential entrant. Firm 1 can adopt one of two technologies. Technology A is
labor intensive and is characterized by a cost function:
CA (y) = 200 + 30y

Technology B is capital intensive, producing goods at zero marginal cost but at a very
high fixed cost CB = 1600. After firm 1 has chosen its technology, firm 2 can consider
entering. However, it has only one technology choice, the labor-intensive, technology A. If
it enters, the two firms compete in quantities.

Questions:

a. If firm 1 was not threatened by entry, which technology would it choose?

b. Suppose firm 1 adopts technology A. Derive the best replies of the two firms in the
post-entry game and show that firm 2 will enter.

c. Determine the subgame perfect equilibrium.

Explanation / Answer

a.

If firm 1 was not threatened by entry, technology A would is choose.

Technology A is labor intensive and it has a little bit (200) fixed input and the rest is variable input. The firm would spend money according to its output level. It gives the firm seasonal benefit—suppose the low production has lower cost burden.

If the firm has entry threatening, technology B should be preferred, because for a new firm recovering the higher fixed cost could be difficult and it may leave the market.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.