suppose that an incumbent dominant firm produces with a cost function given by C = XXXXXXXXXX5qi^2so...

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suppose that an incumbent dominant firm produces with a cost function given by C = XXXXXXXXXX5qi^2so that marginal cost is given by MC = 3qiinverse demand is P = 200-Q , where Q is total output of all sellerssuppose that a second firm is in the market with a cost function C= 100+110qe
c) if the 'victim'firm can ensure itself half of the market but the dominant firm remains the price leader is there a price that the incumbent firm can set that will drive out the rival firm but not violate the Areeda-Turner AVC test?
the Answer for this question is 113

Robert · Accepted Answer

1 

Answer – According to Areeda-Turner AVC Test, the price should not fall below minimum 
of AVC so that firm needs to shut down.  
We have MR as 
PQ = 200Q –Q
2
 
MR = 200 -2Q 
Price will be set by the dominant firm which is the incumbent firm. 
Therefore, 200-2Q = 3qi 
Since,

suppose that an incumbent dominant firm produces with a cost function given by C = XXXXXXXXXX5qi^2so that marginal cost is given by MC = 3qiinverse demand is P = 200-Q , where Q is total output of all...

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