A firm in a perfectly competitive market invents a new method of production that lowers its marginal costs. What happens to its output? What happens to the price it charges?
(a). The firm has an employee who threatens to tell all other firms in the industry about how to implement this new technique. Will it be possible to pribe the employees not to do this? Explain why or why not.
(b). Why should this employee probably choose to tell only some of the other firms rather than all of them?
(c). What factors willdetermine the best number of firms to sell the secret to? (assume that those who get the information keep the secret instead of selling it to still others.)
2: (Requires calculation) A perfectly competitive firm faces a market price of $10 for its output X. It owns two plants, A and B, whose total costs are
TC(a) = 10 + 2X + .25X^2
TC(b) = 15 + .4X + .1X^2
How many units should each plant produce to maximaize profit at that price?