Question
The technology for producing widgets is fully described by the cost function . One of the firms competing in the widget market has an opportunity
The technology for producing widgets is fully described by the cost function . One of the firms competing in the widget market has an opportunity to make an investment to lower its marginal cost from 10 to 8. If the firm makes the investment, no other firm can mimic the investment for the foreseeable future. Which of the following statements is true?
a. If the industry is monopolized (i.e., served by a single seller), the incentive to invest is greater than it would be if the industry were perfectly competitive.
b. If the industry is competitive, the incentive for the firm with the investment opportunity to make the investment is greater than it would be if that firm were a monopolist.
c. Regardless of whether the industry is competitive or monopolized, the incentive to invest is the same.
d. Answer (a) is correct if the demand elasticity is greater than 1, and (b) is correct otherwise.
e. None of the above
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