ECONOMICS W/CONNECT+20 >C<
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ISBN: 9781259714993
Author: McConnell
Publisher: MCG CUSTOM
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Chapter 15, Problem 5DQ
To determine
Reason behind the success of a new product.
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Given the following petroleum tax details, calculate the marginal tax rate and explain
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Total Revenue: $500 million
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Tax Rate: 40%
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Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve.
(Hint:
Show that learning by doing lowers its cost in the second period.)
Part 2
Assume for simplicity the game tree is illustrated in the figure to the right. Pricing below marginal cost reduces profits but gives the incumbent a cost advantage over potential rivals. What is the subgame perfect Nash equilibrium?
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