Determine the current profits, Cost Accounting

Two firms compete in a homogenous product market where the inverse demand function is P = 10 - 2Q (quantity is measured in millions). Firm 1 has been in business for 1 year, while firm 2 just recently entered the market. Each firm has a legal obligation to pay one year's rent of $1million regardless of its production decision. Firm 1's marginal cost is $2, and firm 2's marginal cost is $6. The current market price is $8 and was set optimally last year when firm 1 was the only firm in the market. At present, each firm has a 50 per cent share of the market.

a. Why do you think firm 1's marginal cost is lower than firm 2's marginal cost?

b. Determine the current profits of the two firms.

c. What would happen to each firm's current profits if firm 1 reduced its price to $6 while firm 2 continued to charge $8?

d. Suppose that, by cutting its price to $6, firm 1 is able to drive firm 2 completely out of the market. After firm 2 exists the market, does firm 1 have an incentive to raise its price? Explain.

e. If firm 1 engaging in predatory pricing when it cuts its price from $8 to $6? Explain.

Posted Date: 2/21/2013 1:28:41 AM | Location : United States







Related Discussions:- Determine the current profits, Assignment Help, Ask Question on Determine the current profits, Get Answer, Expert's Help, Determine the current profits Discussions

Write discussion on Determine the current profits
Your posts are moderated
Related Questions
Cash is the other form of fund although in a narrow sense, this refers to a supply which can be drawn upon as per to the need. Here the term cash involves both cash and cash equiva

You are the manager of a firm that sells output at a price of $40 per unit. You are interested in hiring a new worker who will increase your firm's output by 2,000 units per year.

list and explain all the procedures of material control

Financial Accounting It is the analysis, and recording and classification of financial transactions and the ascertainment of how that information will be reported to the diffe

Direct Material Cost Variances (DMCV) This variance is a general difference in the standard direct material cost and the actual direct material cost. This variance may be prese

Kenner company produces two products: SR200 and TX500. Budged sales for four months are as follows; SR200 TX500 May 8,000 20,000 June 13,000 32,000 July 11,000 39,000 August 18,000

the annual overhead costs for abc ltd which has 3 production centeres and 2 service centers are as follows. indirect wages & supervision X 2million Y 2million 3 production departme

The next year's budget for Benny, Inc., is given below: Product 1-2 Sales $945,000-688500 Variable costs 459,900-297,000 Fixed costs 300,000-3

Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2011. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $

Time Rate System - Labour Remuneration It may be a high day rate or a flat time rate. Under flat time rate, all worker is paid for the time spend without considering the vol