Consider an economy in which there is initially one firm, HealthyBran, in the ma
ID: 1132549 • Letter: C
Question
Consider an economy in which there is initially one firm, HealthyBran, in the market for breakfast cereal. A new firm, TastyCereal, is deciding whether to enter the market, which would then change the market to a duopoly. HealthyBran can choose to sell its cereal to grocery stores at either a high or a low price. As a monopolist, it can earn $7.5 million by selling at a high price or $4.5 million by selling at a low price. If TastyCereal enters the market and HealthyBran sells at a high price, each firm makes $2.5 million; itf TastyCereal enters the market and HealthyBran sells at a low price, each firm has a loss of $1.5 million. Suppose that HealthyBran can't set long-term contracts with the grocery stores that sell its cereal. The following diagram shows this game: first, TastyCereal decides whether to enter or not, and then HealthyBran decides whether to sell at a high or low price. $1.5 Million for HealthyBran $1.5 Million for TastyCereal 8 Enter $2.5 Million for HealthyBran $2.5 Million for TastyCereal High Price $4.5 Million for HealthyBran $0 Million for TastyCereal Low Price Don't En High $7.5 Million for HealthyBran $0 Million for TastyCereal TastyCereal decides HealthyBran decidesExplanation / Answer
answer :-
(A)If Tasty Cereal decides to enter in the market despite the threat, Healthy bran would earn a -$1.5 million If it choose low price in the market and it would earn a profit of $2.5 million if it chooses to set high prices.
Therefore, HealthyBran's threat is not credible, and TastyCereal would enter the market.
(B) If HealthyBran decides to sign a contract at a low price, TastyCereal would earn -$1.5 million if it chose to enter the market, and it would earn $0 million if it chose to stay out.Therefore, if healthy bran signed a contract at low price, Tasty cereal would not enter the market and HealthyBran would earn $4.5 million.
On the other hand, if HealthyBran decides to sign a contract at high price, TastyCereal would earn $2.5 million if it chose to enter the market, and it would earn $0 million if it chose to stay out.
Therefore, if HealthBran signed a contract at a high price, TastyCereal would enter the market, and HealthBran would earn $2.5 million.
Anticipating TastyCereal's response to its pricing contract, HealthyBran will sign a contract at low price.