ECO 2020 INCLUSIVE ACCESS
21st Edition
ISBN: 9781260564617
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 38, Problem 5RQ
To determine
Impact of the given situations in the short run and the long run.
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Given the following petroleum tax details, calculate the marginal tax rate and explain
its significance:
Total Revenue: $500 million
Cost of Operations: $200 million
Tax Rate: 40%
Additional Royalty: 5%
Profit-Based Tax: 10%
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?
Answer
Chapter 38 Solutions
ECO 2020 INCLUSIVE ACCESS
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