Strategic Behavior

Strategic Behavior - Answer to 3 Minimum average cost is...

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Practice Questions: Chapter 11 Strategic Behavior 1. How are consumers affected by successful predatory prices over time? 2. Explain why predatory strategies do not work in an industry if no substantial sunk costs exist. 3. Two firms with costs C ( q ) = 50 + q + 2 q 2 share a market in which demand is perfectly inelastic at Q = 10. If Firm 1 preys on Firm 2 by lowering price to an amount x below minimum average cost, how large a loss does it incur itself compared to that inflicted on Firm 2? Is its own loss necessarily larger than that of Firm 2?
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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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