ANALYZING MANAGERIAL DECISIONS: Entry Decision
In the simple Cournot model, firms make their output choices simultaneously. In practice, firms sometimes make these kinds of decisions sequentially.
Suppose that you manage one of the firms discussed in the Output Competition example in the text. The industry demand in this example is P= 100 - Q and the MC of each firm is zero.
1. Suppose that each firm must make an upfront investment of $1,000 to enter the market and that your competition has already paid this Investment and chosen to produce 50 units. This investment is no recoverable (sunk). Should you make the $1,000 investment and enter the market? If so, how much should you produce and what are your profits? Continue to assume that your firm will survive for only one production period.
2. How do your profits and those of your competitor compare to the case of simultaneous decisions discussed in the text? Would you say that this example of output competition has a first mover advantage or disadvantage?
ANALYZING MANAGERIAL DECISIONS: Pricing and Investment Decisions
You work for a drug manufacturing company that holds a patent on Hair Grow, the world's most effective drug for restoring hair. Your job is to analyze the pricing and investment decisions facing the firm. Your marketing group estimates that Hair Grow has the following demand curve: P = 101 - .00002Q
1. Your marginal cost for producing a Hair Grow pill is $1. What is the profit-maximizing price and quantity? What is your profit?
2. Suppose that your production facility can only produce 1,000,000 pills. What is your optimal price and quantity given the production constraint? What are your profits? 3. Suppose that you could increase the capacity of your plant to 3,000,000 pills within a two-year period for a cost of $30,000,000. Should you undertake the investment (for simplicity, assume you can borrow the funds for the expansion at a 0 percent interest rate)?