Reference no: EM13850515

Suppose that an incumbent dominant firm produces with a cost function given by

C = 100 + 1.5qisquared

so that marginal cost is given by

MC = 3qi

Inverse demand is P = 200- Q where Q is total output of all sellers.

Suppose that a second firm

is in the market with a cost function C = 100 + 110qe.

(a) If the incumbent sets a price equal to 74 and meets all of the market demand at that price, is
this price "predatory" under the Areeda-Turner "marginal cost" test?

(b) Is the same price "predatory" under the Areeda-Turner average variable cost (AVC) test?

(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 firmbut not violate the Areeda-Turner AVC test?

(d) Which firm is more "efficient"? Criticize the Areeda-Turner test on the basis of these exercises.