An existing firm offers to supply one unit of a good to a potential buyer by writing a contract in period 1 for delivery in period 2. The contract specifies a price of $210 and a breach of contract fee of $150. The buyer would be willing to pay $330 and the existing firm has a marginal cost of $120. A potential entrant firm has costs uniformly distributed and competes in Bertrand competition with the existing firm if entry occurs. It is known that the entrant’s costs are less than or equal to $240. How much extra profit would the entrant earn if there were no contract in place between the existing firm and the buyer? Select one: a. $22.50 b. none of the other answers c. $31.50 d.

An existing firm offers to supply one unit of a good to a potential buyer by writing a contract in period 1 for delivery in period 2. The contract specifies a price of $210 and a breach of contract fee of $150. The buyer would be willing to pay $330 and the existing firm has a marginal cost of $120. A potential entrant firm has costs uniformly distributed and competes in Bertrand competition with the existing firm if entry occurs. It is known that the entrant’s costs are less than or equal to $240. How much extra profit would the entrant earn if there were no contract in place between the existing firm and the buyer? Select one: a. $22.50 b. none of the other answers c. $31.50 d.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter16: Bargaining

Section: Chapter Questions

Problem 5MC

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$22.50

none of the other answers

$31.50

$28.50

$25.50

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