Firm 1 must decide whether to enter an industry in which firm 2 is an incumbent. To enter this industry, firm
Firm 1 must decide whether to enter an industry in which firm 2 is an incumbent. To enter this industry, firm
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![Firm 1 must decide whether to enter an industry in which firm 2 is an incumbent. To enter this industry, firm 1 must choose to build either a plant with a small output capacity (S), or large output capacity (L). A plant with
small capacity costs $50 to set up; one with large capacity cost $175. In either case, the marginal cost of production is zero. But firm 1 can also opt to stay out (O), in which case it does not incur any type of cost. Firm 2 is
able to observe firm 1's decision before deciding whether to expand or not its initial small output capacity operation. Expanding (E) costs firm 2 $75, whereas not expanding (N) incurs no cost for the firm. In either case, the
marginal cost of production is also zero.
The revenues under the different scenarios are given below.
- If only one small firm exists, its revenue is $80, the other earns zero.
- If two small firms exist, each earns revenue of $70.
- If only one large firm exists, its revenue is $200, the other earns zero.
- If two large firms exist, each earns revenue of $90.
- If one small and one large firm exist, the small firm earns $40, while the large one earns $160.
Answer the following:
a) How many pure strategies are available for firm 1?
b) How many pure strategies are available for firm 2?
c) What is the sum of the firms' profits in the subgame perfect equilibrium?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa8edb1ae-a456-4939-9152-e7a523d58601%2F56602e32-b1f6-4aab-b5c2-6aa1d0c152b2%2Ff7lhxyi_processed.png&w=3840&q=75)
Transcribed Image Text:Firm 1 must decide whether to enter an industry in which firm 2 is an incumbent. To enter this industry, firm 1 must choose to build either a plant with a small output capacity (S), or large output capacity (L). A plant with
small capacity costs $50 to set up; one with large capacity cost $175. In either case, the marginal cost of production is zero. But firm 1 can also opt to stay out (O), in which case it does not incur any type of cost. Firm 2 is
able to observe firm 1's decision before deciding whether to expand or not its initial small output capacity operation. Expanding (E) costs firm 2 $75, whereas not expanding (N) incurs no cost for the firm. In either case, the
marginal cost of production is also zero.
The revenues under the different scenarios are given below.
- If only one small firm exists, its revenue is $80, the other earns zero.
- If two small firms exist, each earns revenue of $70.
- If only one large firm exists, its revenue is $200, the other earns zero.
- If two large firms exist, each earns revenue of $90.
- If one small and one large firm exist, the small firm earns $40, while the large one earns $160.
Answer the following:
a) How many pure strategies are available for firm 1?
b) How many pure strategies are available for firm 2?
c) What is the sum of the firms' profits in the subgame perfect equilibrium?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![FINANCIAL ACCOUNTING](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Accounting](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
![Accounting Information Systems](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
![FINANCIAL ACCOUNTING](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Accounting](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
![Accounting Information Systems](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
![Horngren's Cost Accounting: A Managerial Emphasis…](https://www.bartleby.com/isbn_cover_images/9780134475585/9780134475585_smallCoverImage.gif)
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
![Intermediate Accounting](https://www.bartleby.com/isbn_cover_images/9781259722660/9781259722660_smallCoverImage.gif)
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
![Financial and Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781259726705/9781259726705_smallCoverImage.gif)
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education