4. Firm 1 and Firm 2 are in a duopoly, earning each annual profits of £10 million per year. Firm 1 could earn £20 millio

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4 Firm 1 And Firm 2 Are In A Duopoly Earning Each Annual Profits Of 10 Million Per Year Firm 1 Could Earn 20 Millio 1 (27.81 KiB) Viewed 53 times

4. Firm 1 and Firm 2 are in a duopoly, earning each annual profits of £10 million per year. Firm 1 could earn £20 million per year as a monopolist. Firm 1 drops its price to £40 when its marginal cost is £50 and holds it there for a year to be able to drive Firm 2 out of the market. (a) What pricing strategy is the manager of Firm 1 considering? Explain this strategy and how it helps to reduce competition in a market. (b) The year that it drops its price, Firm 1 will lose £10 million. At what level of interest rate i will the strategy of Firm 1 be profitable?