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Unformatted text preview: Answer to 3. Minimum average cost is $21. If Firm 1 lowers price to $21 x , Firm 2 produces where its marginal cost 1 + 4 q equals the new price. Thus, Firm 2 reduces output to 5 x /4 and incurs a loss of ( AC p ) q = 5 x x 2 /8. Firm 1, in order to maintain the lower price, has to meet the remaining demand of 5 + x /4 and incurs a loss of 5 x + 3 x 2 /8 doing so. This loss is always larger than that of Firm 2....
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This note was uploaded on 05/04/2008 for the course BUAD 305 taught by Professor Davila during the Spring '07 term at USC.
- Spring '07