Firm X is the only firm in its industry. Currently, Firm X charges $75 per unit, a price well in excess of its marginal

cost of $5 per unit, and earns $70 million per year in profit. According to a trusted source, the manager of Firm X

learned that a new firm is contemplating entering the market. This would reduce its profit to $40 million per year. If

Firm X expanded its output and lowered its price to $50, the entrant would find it unprofitable to enter the market,

and Firm X would earn profits of $50 million per year for the indefinite future. Explain and show your work:

a. What pricing strategy is the manager of Firm X considering? (2)

b. If Firm X was able to credibly commit to maintain a price of $50, would it be a profitable strategy? Explain. (6)

Firm X is the only firm in its industry. Currently, Firm X charges $75 per unit, a price well in excess of its marginal cost of $5 per unit, and earns $70 million per year in profit. According to a trusted source, the manager of Firm X learned that a new firm is contemplating entering the market. This would reduce its profit to $40 million per year. If Firm X expanded its output and lowered its price to $50, the entrant would find it unprofitable to enter the market, and Firm X would earn profits of $50 million per year for the indefinite future. Explain and show your work: a. What pricing strategy is the manager of Firm X considering? (2) b. If Firm X was able to credibly commit to maintain a price of $50, would it be a profitable strategy? Explain. (6)