Answer to Question #87731 in Macroeconomics for ricky

Question

Firm X Strategy
High-price Low-price
High-price X = $200
Y = $200 X = $250
Y = $ 50
Low-price X = $ 50
Y = $250 X = $ 50
Y = $ 50


Firm Y Strategy


3.1. Situation 1: Each firm chooses a high-price strategy. Result: Each firm will earn $______ million in profit for a total of $______ million for the two firms.
3.2. Situation 2: Firm X chooses a low-price strategy while Firm Y maintains a high-price strategy. Result: Firm X will earn $_______ million and Firm Y will earn $_______ million. Compared to Situation 1, Firm X has an incentive to cut prices because it will earn $_______ million more in profit and Firm Y will earn $_______ million less in profit. Together, the firms will earn $_______ million in profit, which is $_______ million less than in Situation 1.

Answer 1

3.1. Situation 1: Each firm chooses a high-price strategy. Result: Each firm will earn $200 million in profit for a total of $400 million for the two firms.

3.2. Situation 2: Firm X chooses a low-price strategy while Firm Y maintains a high-price strategy. Result: Firm X will earn $250 million and Firm Y will earn $50 million. Compared to Situation 1, Firm X has an incentive to cut prices because it will earn $50 million more in profit and Firm Y will earn $150 million less in profit. Together, the firms will earn $300 million in profit, which is $100 million less than in Situation 1.