Question

Consider a market with a monopoly firm. Sales revenue of this firm is $15,120,000, total cost is $9,180,000, and average cost is $3.40. Another firm wants to enter the market and provide the same product at a lower price. To intimidate the potential competitor, the monopoly firm intends to use predatory pricing.

By how much can this firm reduce the price of its product without losses? Enter your answer in the box below and round to two decimal places if necessary.

Answer 1

Ans: $2.20

Explanation:

A predatory pricing is a strategy a monopolist adopts to keep competitors out of market. Predatory pricing occurs when a monopolist drasically reduces the price of the product to make it impossible for competitors to stay in the market.

Here, the total cost of production = $9,180,000

AC = $3.40

Quantity produced = 9,180,000 / 3.40 = 2,700,000

Current price = Revenue / Quanity = 15,120,000 / 2,700,000 = $5.60

The firn can reduce it's price equal to the average cost where, it can have no profit no loss situation. So, the firm can reduce price to $3.40.

Thus, the firm can reduce the price of its products by $5.60 - $3.40 = $2.20.