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Question 2: There is a firm that produces specialized machines, which require a substantial investment in learning the details of the client's business, think of
Question 2: There is a firm that produces specialized machines, which require a substantial investment in learning the details of the client's business, think of industrial sewing machines or equipment for physics laboratories. The firm invests effort e in producing the machine, at cost re. The client's profits are increasing in the effort put into the machine, with r(e) = ae. The firm can sell the machine on the market for a payoff be, b
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