High School

Suppose there are 100 price-sensitive consumers who are willing to pay $100 for a product. An incumbent (I) faces a potential entrant (E). The incumbent's marginal cost is $35, and the entrant's marginal cost is $45. Determine the incumbent's optimal pricing strategy.

Answer :

Final answer:

The incumbent's optimal pricing strategy is to set the price at $35.

Explanation:

In order to determine the incumbent's optimal pricing strategy, we need to consider the demand curve and the marginal cost. The incumbent should set the price where the marginal cost equals the marginal revenue. In this case, with a marginal cost of $35, the incumbent should set the price at $35.

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