Quick New Products, Inc., specializes in launching new products and uses intensive television advertising campaigns to encourage high-volume sales before any other firm can enter with a competing product. QNP has a new product ready to launch called the “tender trap,” a mouse¬ trap which mice seem to love. Based on its experience, it expects to sell 20,000 units of this product in the first year at the introductory price of $9.95. Its initial cost (for the first 1,000 units) will be $14 per unit, but it expects costs to fall 20 percent for every doubling of output from that point forward. By the time it has sold 20,000 units, it expects two other rivals to be ready to imitate its product, and it expects that it will sell only 5,000 units per year in the follow¬ ing two years, with price gradually falling from $9.95 to $5.95. Total sales (QNP plus rivals’) will be 15,000 in each of the second and third years. Its competitors will be subject to the same learning curve when they begin production as was QNP.

(a) Show graphically the dynamic price and average cost path over time for both QNP and one of its rivals (assume the rivals are similar).

(b)Explain the advantages which QNP can expect to derive as the result of being the first- mover in this market.