25.4 Business Application: Entrepreneurial Skill and Market Conditions: We often treat all firms as if they must inherently face the same costs, but managerial or entrepreneurial skill in firms can sometimes lead to a decrease in the marginal cost of production. We investigated this in the competitive setting in exercise 14.5 of Chapter 14 and now investigate the extent to which effective managers can leverage their skill in oligopolies depending on the market conditions they face.

A. Suppose two firms in an oligopoly face a linear demand curve, constant marginal costs MC1 and MC2

, and no recurring fixed costs. Assume MC1 6 MC2

.