Q1. What is the efficiency effect? What is the replacement effect? Use these definitions to analyse whether a competitive firm or an incumbent monopolist has a greater incentive to innovate?

Q2. Both Carol and Jackie produce a homogenous product. They both have zero marginal costs and simultaneously choose price. Consumers buy from the cheapest seller; if both prices are the same consumers evenly split between the vendors. In equilibrium what is the price of Carol and Jackie?

a. pc = pj = 0

b. pc > pj = 1

c. pc = pj >0

d. All of the above

e. None of the above.