An Incumbent's Threat to Use Limit Pricing If a Firm

question 34

Multiple Choice

An incumbent's threat to use limit pricing if a firm enters the market

• A)is credible if the firms have identical costs and market demand supports both firms.
• B)is credible if the firms have different costs and market demand won't support both firms.
• C)is not credible if the firms have different costs and market demand won't support both firms.
• D)is cheap talk, because the other firm will enter, and the incumbent will still be able to charge monopoly pricing.

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Definitions:

Permits

Official documents or licenses that authorize individuals or companies to undertake certain activities, often subject to regulations.

Pollution

The introduction of contaminants into the natural environment that cause adverse change.

External Costs

Costs that are not reflected in the market price of goods or services, often burdening third parties not involved in the transaction.

External Benefits

Positive effects of a production or consumption activity on third parties not directly involved in the transaction.